Tax benefits of buying agricultural land in Chennai

Buying agricultural land in Chennai, Tamil Nadu, has certain tax advantages that draw those who work in agriculture to the investment. Recognizing these advantages calls for a precise division between agricultural land in cities and rural areas. This blog will discuss the tax benefits associated with both types of agricultural land and the conditions under which they apply.

What is agricultural land?

Farmers set aside agricultural land for activities such as farming, gardening, and cattle raising. Its sole function is agriculture; it cannot serve residential or other commercial purposes. There are two categories of agricultural land in Tamil Nadu:

Rural agricultural land: land under the authority of a municipality with fewer than 10,000 residents. Outside municipal boundaries, it meets the requirements for rural status according to particular distances and population ratios to the closest municipality.

Urban Agricultural Land: Land that is not in the rural category but rather within metropolitan regions.

Tax Benefits on Rural Agricultural Land

Owners of rural agriculture land in Tamil Nadu are entitled to notable tax benefits:

Income from Agriculture: Income from farming operations on rural agricultural property is not subject to taxes. This comprises income from livestock raising, gardening, and farming. Those who actively engage in farming find the exemption enticing, provided that their income originates directly from agricultural activities. The sale of rural agricultural land can result in tax-free gains. This is due to the fact that Indian tax legislation does not consider rural agricultural land as a capital asset. Thus, the fact that capital gains tax does not apply to any profit from the sale of such land greatly benefits landowners.

It's important to remember that every state has different requirements for buying agricultural land. In the past, only farmers in Tamil Nadu could purchase land. To increase agricultural investment, new legislation has, however, permitted non-farmers to purchase agricultural land under specific restrictions. Furthermore, buying rural agricultural property does not require Tax Deducted at Source (TDS), which streamlines the transaction and lessens the buyer's initial tax liability.

Tax Benefits on Urban Agricultural Land

Urban agricultural land in Chennai receives a different tax treatment because it's considered a capital asset. The tax treatment of the property depends on the length of ownership.

Short-Term Capital Gain (STCG): If the individual holds the land for less than two years, any profit from the sale is considered a short-term capital gain and subject to their income tax slab rate. As a result, the person's total income may increase.

Long-Term Capital Gain (LTCG): After providing for indexation benefits, the profit, if held for more than two years, is considered a long-term capital gain and subject to a 20% tax rate. Indexation helps adjust the property's purchase price to account for inflation, minimizing the taxable gain and final tax bill.

Urban agricultural land is subject to property tax, much like other non-agricultural properties, whereas rural agricultural land is not. Local municipal officials set property tax rates, which change based on the property's usage and location.

Mandatory urban agricultural land acquisition has huge tax benefits

There are certain tax exemptions for the required purchase of urban agricultural land under Section 10(37) of the Income Tax Act, 1961. You can claim these exemptions under the following circumstances:

Classification: We must classify the property as urban agricultural land.

Agricultural Use: For at least two years immediately before the acquisition date, the person, their family (HUF), or their parents must have used the land for agricultural purposes.

Compulsory Acquisition: Under any law, the transfer must occur through a mandatory acquisition, or the Reserve Bank of India or the Central Government must decide or sanction the compensation.

Timing: Income from such a transfer has to have come from compensation received on or after April 1, 2004.

If these requirements are satisfied, the capital gains from the forced purchase of urban agricultural land are tax-free. Landowners purchasing property for development or public initiatives benefit greatly from this exemption.

Additional considerations for investors in Chennai

State-Specific Regulations: Investors should be aware of the regulations unique to each state governing the purchase and use of agricultural land. Specific limitations apply to non-agriculturists purchasing agricultural land in Tamil Nadu, but recent changes have loosened these restrictions to encourage agricultural investment.

Land Conversion: Investments intending to convert agricultural land for non-agricultural uses are subject to local land conversion regulations. It can take a while, and there could be extra taxes and fees involved.

Inheritance and Gift Tax: You receive favorable tax treatment when receiving land as an inheritance or gift. Relatively acquired agricultural land does not require the recipient to pay gift tax, and the income from such land is tax-free.

GST Impact: Buyers find agricultural land more affordable because it is exempt from the Goods and Services Tax (GST). Legal fees, brokerage, and land development services, however, can be subject to GST.

Conclusion

Tax advantages abound for investing in agricultural land in Chennai, Tamil Nadu, especially in rural areas where farming gains and income are tax-free. Recognizing the distinctions between short-term and long-term capital gains, as well as the grounds for exemptions on compulsory acquisition, can lead to significant tax savings for urban agricultural property. Investors looking to maximize their investment returns should also be aware of state-specific laws and possible future land use plans. Knowing these tax advantages can help investors and farmers make wise decisions and maximize the return on their agricultural property investments.