When Is Farm Land Sale Taxed?

Agricultural land is of two types.  The first is rural, i.e., agricultural land in rural areas and the second is urban, i.e., agricultural land in urban areas.
Not every piece of land used in farming is considered agricultural land in the eyes of the Income Tax Act.
Your agricultural land is not considered agricultural land under the Income Tax Act until it meets the conditions mentioned in Section 2 (14) of the Income Tax Act.
For example, if your agricultural land falls within a municipality, notified area committee, town area committee or cantonment board and its population is 10,000 or more, then this land will not be considered as agricultural land, according to the Income Tax Act.

If the population of the municipality or cantonment board is more than 10 thousand but up to 1 lakh,  then the land coming within a radius of 2 kilometers will not be considered as agricultural land.

If the population of the municipality or cantonment board is more than 1 lakh and up to 10 lakh, then the area coming within a radius of 6 kilometers on all sides will not be considered as agricultural land.

Similarly, if there is a population of more than 10 lakh in the municipality or cantonment, then the land located within a radius of up to 8 kilometers will not be considered as agricultural land.

“If your agricultural land does not fall within the specified boundaries, then, it will come under the purview of Income Tax Act. Agriculture land is not considered a capital asset under the Income Tax Act.  Therefore, no capital gains tax will be levied on the income from its sale. If your agricultural land falls within the previously-mentioned boundaries it will be considered a capital asset. These are classified as urban agriculture lands.  Capital gain tax will have to be paid on the profit made on sale of these lands. If the land is sold after keeping it for 24 months,  the profit will be considered as long-term capital gain.  A tax of 20% will be levied on this along with indexation benefit.  If agricultural land is sold within 24 months of purchase, short-term capital gain tax will be levied on the profit.  The tax will be calculated on the amount of capital gain according to your tax slab. You can save capital gain tax by purchasing another agricultural land under section 54 (B) subject to terms and conditions.

The person or his family should have used this land for agriculture work for up to two years before the date of its sale.
The agricultural land must be purchased within two years of selling the previous one . The second agricultural land can be any rural or urban agriculture land.
Also, the new agriculture land cannot be sold for three years. If sold before 3 years, the exemption will be withdrawn and tax will have to be paid.
Tax and investment expert Balwant Jain says that under section 54F, you can save tax on capital gains made from selling of urban agriculture land if you purchase a residential property. For this, instead of capital gain, the entire amount received from selling rhe land will have to be used to buy a house.  The house must be purchased within two years of selling the land.
In case of construction, the house should be built within three years. You can also take exemption under 54F on a house purchased up to one year before the date of selling the land.
You can also invest in capital gain bonds under section 54EC.

From the financial year 2023-24, under section 54F, tax exemption can only be claimed on long-term capital gains of up to 10 crore rupees. Any capital gain above 10 crores will be taxable.