- Date : 29/10/2022
- Read: 5 mins
Let's understand the tax liability on land acquired by the government and how capital gains on land is computed.
While real estate can be one of the greatest financial assets to own, it can also be a little tricky at times. In India, the government has the authority to procure private rights in land even in the absence of the owner or occupant’s consent. As unfair as this may sound, the government may do so to benefit society. In return, the owner or occupant is given a payment equivalent to the value of the concerned land. But what happens to the tax on land sale in such a case?
The taxability of compensation received for compulsory acquisition of land is frequently a matter of confusion for the ordinary citizen. The introduction of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation, and Resettlement (RFCTLARR) Act, 2013 added new aspects to it.
What is compulsory acquisition of land?
Compulsory acquisition is the government’s power to acquire private rights in land – even without the owner’s consent – for the development of society. The government pays due compensation against such an acquisition and the capital gains are calculated as per the provisions of the Income Tax Act, 1961.
But the bigger question is whether compensation received from compulsory acquisition is taxable or not.
Also Read: 7 Things To Know Before You Invest In Land
Cost of acquisition in income tax
According to Section 2(14) of the Income Tax Act, agricultural land that is not situated in a specified urban area is not a ‘capital asset’ and is thus exempted from income tax altogether.
While the Act qualifies urban agricultural land as a capital asset, any capital gain from the compulsory acquisition of such land is also exempt as per section 10(37) of the Act – as long as some conditions are met.
The RFCTLARR Act of 2013 reiterated this. Under Section 96 of the Act, Income Tax shall not be levied on any award or agreement made under the act, except those made under Section 46. The Act is wider in scope as it makes no distinction between compulsory acquisition of agricultural and non-agricultural land.
So, while the Income Tax Act provides exemptions for only agricultural land, the RFCTLARR Act provides exemptions for all compensation against compulsory acquisition – whether the land is rural, urban, agricultural, or non-agricultural.
Is tax planning getting too taxing for you? Hack your way out with insightful reads here.
Three case studies to understand tax on land sale
Let’s consider three examples to understand this better.
1. Our residential building was acquired by a central government agency in 1990. Is the compensation we received taxable?
This scenario involves the compulsory acquisition of non-agricultural land by the government. Since the transfer occurred before the enactment of the RFCTLARR Act, the compensation so received will be taxable.
2. Our house was acquired by the government in December 2013 under the National Highway Act, 1956. Is the compensation we received taxable?
The RFCTLARR Act was enacted in September 2013 and commenced on January 1, 2014. The compensation received for the compulsory acquisition of non-agricultural land before the commencement of the act will be taxable.
3. Our land was acquired by the government for road widening in 2019. Will the amount we receive as compensation be taxable?
As per the RFCTLARR Act and the latest CBDT circular issued in 2016, such compulsory acquisition of land is exempt from income tax.
How capital gains are computed for tax on sale of capital assets?
Capital gains are the profits arising from the sale of capital assets, which are of two types:
- Short-term capital assets are assets that are held for less than 36 months. In this case, capital gain is computed as:
- Short-term capital gain = complete value of consideration – (cost of acquisition + cost of transfer + cost of improvement).
- Long-term capital assets are assets that are held for a period of 36 months or more. In this case, capital gain is computed as:
- Long-term capital gain = complete value of consideration – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where:
- Indexed cost of acquisition = (cost of acquisition x cost inflation index of the year of transfer) / cost inflation index of the year in which land was acquired.
- Indexed cost of improvement = (cost of improvement x cost inflation index of the year in which it was transferred) / cost inflation index of the year of improvement.
When they are not exempted, long-term capital gains are taxable at 20% while short-term capital gains are calculated at slab rate.
Also Read: Your Guide To Understanding Capital Gains In India (Part 1)
Conclusion
As we just saw, compensation received for the acquisition of both agricultural and non-agricultural land by the government is not taxable if it was acquired after January 2014.
While real estate can be one of the greatest financial assets to own, it can also be a little tricky at times. In India, the government has the authority to procure private rights in land even in the absence of the owner or occupant’s consent. As unfair as this may sound, the government may do so to benefit society. In return, the owner or occupant is given a payment equivalent to the value of the concerned land. But what happens to the tax on land sale in such a case?
The taxability of compensation received for compulsory acquisition of land is frequently a matter of confusion for the ordinary citizen. The introduction of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation, and Resettlement (RFCTLARR) Act, 2013 added new aspects to it.
What is compulsory acquisition of land?
Compulsory acquisition is the government’s power to acquire private rights in land – even without the owner’s consent – for the development of society. The government pays due compensation against such an acquisition and the capital gains are calculated as per the provisions of the Income Tax Act, 1961.
But the bigger question is whether compensation received from compulsory acquisition is taxable or not.
Also Read: 7 Things To Know Before You Invest In Land
Cost of acquisition in income tax
According to Section 2(14) of the Income Tax Act, agricultural land that is not situated in a specified urban area is not a ‘capital asset’ and is thus exempted from income tax altogether.
While the Act qualifies urban agricultural land as a capital asset, any capital gain from the compulsory acquisition of such land is also exempt as per section 10(37) of the Act – as long as some conditions are met.
The RFCTLARR Act of 2013 reiterated this. Under Section 96 of the Act, Income Tax shall not be levied on any award or agreement made under the act, except those made under Section 46. The Act is wider in scope as it makes no distinction between compulsory acquisition of agricultural and non-agricultural land.
So, while the Income Tax Act provides exemptions for only agricultural land, the RFCTLARR Act provides exemptions for all compensation against compulsory acquisition – whether the land is rural, urban, agricultural, or non-agricultural.
Is tax planning getting too taxing for you? Hack your way out with insightful reads here.
Three case studies to understand tax on land sale
Let’s consider three examples to understand this better.
1. Our residential building was acquired by a central government agency in 1990. Is the compensation we received taxable?
This scenario involves the compulsory acquisition of non-agricultural land by the government. Since the transfer occurred before the enactment of the RFCTLARR Act, the compensation so received will be taxable.
2. Our house was acquired by the government in December 2013 under the National Highway Act, 1956. Is the compensation we received taxable?
The RFCTLARR Act was enacted in September 2013 and commenced on January 1, 2014. The compensation received for the compulsory acquisition of non-agricultural land before the commencement of the act will be taxable.
3. Our land was acquired by the government for road widening in 2019. Will the amount we receive as compensation be taxable?
As per the RFCTLARR Act and the latest CBDT circular issued in 2016, such compulsory acquisition of land is exempt from income tax.
How capital gains are computed for tax on sale of capital assets?
Capital gains are the profits arising from the sale of capital assets, which are of two types:
- Short-term capital assets are assets that are held for less than 36 months. In this case, capital gain is computed as:
- Short-term capital gain = complete value of consideration – (cost of acquisition + cost of transfer + cost of improvement).
- Long-term capital assets are assets that are held for a period of 36 months or more. In this case, capital gain is computed as:
- Long-term capital gain = complete value of consideration – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where:
- Indexed cost of acquisition = (cost of acquisition x cost inflation index of the year of transfer) / cost inflation index of the year in which land was acquired.
- Indexed cost of improvement = (cost of improvement x cost inflation index of the year in which it was transferred) / cost inflation index of the year of improvement.
When they are not exempted, long-term capital gains are taxable at 20% while short-term capital gains are calculated at slab rate.
Also Read: Your Guide To Understanding Capital Gains In India (Part 1)
Conclusion
As we just saw, compensation received for the acquisition of both agricultural and non-agricultural land by the government is not taxable if it was acquired after January 2014.
