Sale of capital assets attracts capital gains tax and in case the property has been held for over three years, long term capital gains tax is charged. In case of agricultural land, location where the piece of land is situated decides whether it is a capital asset or not i.e. not every agricultural land qualifies as a capital asset. Correspondingly, capital gains tax implication on sale of such a agricultural land i.e. not a capital asset does not arise.

In the case when the agricultural land is held for a period of three years before sale, any gains accruing on its sale shall be termed as long term capital gains and in the other case short term capital gains. If the property has been inherited from ancestors in that case the holding period from the date of actual purchase by the property owner has to be accounted for. Also, cost of acquisition of the land shall be the cost at which the asset was acquired by the previous owner, other than in case of gift, inheritance etc., increased by the cost of improvement if any.

So, for instance, in case the agricultural land has been inherited by your father from his grandfather, then the period for which it was held by his grandfather as well as the cost that he paid for its acquisition shall be taken into account as he was the actual owner from whom the land has been later inherited.

Computation of tax liability on sale of agricultural land

In case the agricultural land has been acquired by your father's grandfather before April 1, 1981, then your father has the option to take the actual cost of acquisition or the fair market price of the land as on April 1, 1981. An indexation benefit is available while determining long term capital gains and the cost of acquisition is adjusted by accounting for the cost inflation index (CII) in the year the land was originally acquired and the year when it was sold. And, taxation @ 20% shall apply on realized long term capital gains.

In case you wish to get exemption on this accruing LTCG you can reinvest the gains in a new agricultural land or a residential premise or specified bonds within the provided time line subject to other specified conditions.

Short term capital gains tax with no indexation benefit (when such a land has been held for a tenure of less than three years and sold) will be taxed in accordance with the progressive tax rate in which your father falls. And surcharge if applicable together with the education cess shall be charged on the basic tax rate.

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