Purchase of Urban Agricultural Land and Tax Planning in India

Purchase of Urban Agricultural Land and Tax Planning in India: 

Before buying urban agricultural land, enquire from the local municipality or corporation as to the legal status regarding minimum land holding for a farm house or construction activities on urban agricultural land. This is very important.In Delhi, for example, the minimum urban agricultural land required for construction of a farm house is 2 ½ acres. In Haryana, for a similar purpose, the minimum is 2 acres. If the object of buying urban agricultural land is to build a farm house, do get the building plan approved before starting construction; otherwise it may result in unauthorised construction with the attendant problems of demotion, fine and penalty, coupled with prosecution. Whenever you make an investment in urban agricultural land, make it a point to effect your purchase by way of a registered conveyance deed and not merely through an agreement to sell. This aspect is very important lest out of ignorance you end up buying a piece of urban agricultural land which has problems of Sections 4 and 6 of the Land Acquisition Act, whereby it is not legal to sell or effect a conveyance deed. Which is why the seller may be ready to give you possession coupled with a Power of Attorney. Avoid making such an investment; if a clear title is not established in your name, the property will lose its value as an investment. You must fully investigate that Sections 4 and 6 of the Land Acquisition Act, putting restrictions on transfer and registration of the land, are not applicable to the land in question.

Certain pieces of urban agricultural land are nowadays converted into unapproved colonies. From the point of view of investment, it is not good to buy such property as there are chances of demolition or prosecution. Income from urban agricultural land, being agricultural income, is completely exempted from income tax. However, such agricultural income would be aggregated for rate purposes. Hence, from the point of view of tax planning, urban agricultural land should be purchased in the name of family members whose income is relatively lower. The ceiling laws applicable to rural agricultural land also apply to urban agricultural land. Capital gains tax is payable on the sale of urban agricultural land. Briefly, if the long- term capital gains on the sale of urban agricultural land used by the assessee for a minimum period of two years are period of two years are invested in buying another piece of agricultural land, there would be no capital gains under Section 54B. Capital gains on the compulsory acquisition of urban agricultural land is exempt u/s 10(37). Similarly,capital gains on the sale of agricultural land could also be utilised for the purpose of Section 54F, namely, investing the sales proceeds of long- term capital gains from agricultural and in buying a residential house. However, for this purpose, the individual or the HUF taking advantage of this provision should not have more than one residential house property of his own. Similarly, starting from Financial Year 1993- 1994, there is wealth tax liability @ 1% on all agricultural land situated in urban area in any part of India. This has come about because the definition of ‘assets’ for wealth tax purposes was drastically amended by the Finance Act, 1992. As a result of the change of definition of “urban land,” urban agricultural land is now liable to wealth tax. However, the wealth tax liability only arises when the gross wealth of the taxpayer exceeds the exemption limit of taxable net wealth.