Jigar M. Patel
International Tax Attorney
Tests for determining whether an Agricultural Land is ‘rural’
Section 2(14) of the Income-tax Act, which defines ‘capital asset,’ excludes from within its purview an agricultural land situated in India at a place having a population of less than 10,000 as per the last preceding census and at an area not comprised within any municipal limits or within a prescribed distance from such municipal limits.
The prescribed distance is determined within a range of upto 2, 6 or 8 kms. (such distance being the aerial distance) from the municipal limit, based on the population described hereunder:
- Where population is more than 10,000 but not exceeding 1 lakh, 2 kms.
- Where population is more than 1 lakh but not exceeding 10 lakhs, 6 kms.
- Where population is more than 10 lakhs, 8 kms.
If such agricultural land, colloquially referred to as a ‘rural land,’ sold by a taxpayer does not qualify as a ‘capital asset’ on the basis of the above test, then it does not give rise to any taxable capital gains. Any agricultural land situated in any ‘urban area’ on the basis of the above guidelines is required to be treated as a ‘capital asset’ and thus any gains arising from the transfer of the same would be liable to tax as capital gains.
Exemption for Compensation on Urban Agricultural Land Acquisition
However, a special exemption has been provided under Section 10(37) in respect of capital gains arising out of compensation or consideration received for any urban agricultural land on account of compulsory acquisition under law. This exemption is further subject to the condition that the land in question was used for agricultural purposes either by the individual or his parent or by his HUF during the period of 2 years immediately preceding the transfer.
It needs to be noted, however, that even in such cases, while the amount of capital gains out of the award of compensation would be exempt, the compensation awarded in the form of interest would very much be taxable as ‘income from other sources’ in the hands of the taxpayer.
As per Section 145B, interest received by a taxpayer on compensation or on enhanced compensation, as the case may be, is deemed to be the income of the year in which it is received. However, under Section 57(iv), it has been provided that a deduction of a sum equal to 50% shall be allowed in respect of such income treated as taxable in the year of receipt.
Compensation under RFCTLARR Tax Exempt even in case of NA Lands
The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (in short “RFCTLARR Act) came in to force from 1st January, 2014. Circular No. 36 of 2016, dated 25th October, 2016 issued by the Central Board of Direct Taxes (CBDT) has offered due recognition to the provisions of Section 96 of this Act, so as to treat Award under the said Act as tax-free under the Income-tax Act, 1961.
The aforesaid Circular has clarified that, “as no distinction has been made between compensation received from compulsory acquisition of agricultural land and non-agricultural (NA) land in regard to providing exemption from income-tax under Section 96 of the RFCTLARR Act, the matter has been examined by the Board and it is hereby clarified that compensation received in respect of award or compensation under the RFCTLARR Act shall not be taxable under the Income-tax Act, even though there is no specific provision of exemption for such compensation.”
