Rural Agricultural Land: A Rural Agricultural Land does not qualify to be a capital asset, hence no capital

gains/loss arise on sale or transfer of Rural Agricultural Land.

Urban Agricultural Land: An Urban Agricultural Land qualifies to be a capital asset, hence capital gains
shall arise on sale or transfer of urban agricultural land.

Nature of capital gain like long term or short term will depend upon the no. of years asset is held by the
assessee. If the period of holding is more than 2 years then the capital gain arising will be termed as
long-term capital gain. If the holding period is shorter than 2 years, then the gain arising is termed as
short-term capital gain. Long term capital gain shall be taxable at 20% whereas short term capital gain is
chargeable at slab rate.

Exemption in case of Compulsory Acquisition of Urban Agricultural Land:

Urban agricultural land is although a capital asset but any capital gain arising from the compulsory
acquisition of such land shall be exempt as per Section 10(37) of the Income Tax Act, 1961, if certain
conditions mentioned in that section are satisfied.

Conditions to be satisfied for claiming exemption from Capital Gains u/s 10(37)–

1. Such land should be an Urban Agricultural Land.

2. Such land, during the period of two years immediately preceding the date of transfer, was being
used for agricultural purposes by HUF or individual or his parent.

3. Such transfer is by way of compulsory acquisition under any law, or a transfer the consideration
for which is determined or approved by the Central Government or the Reserve Bank of India.

4. Such income has arisen from the compensation or consideration for such transfer received by
such assessee on or after the 1st day of April 2004.

Conditions to be satisfied for claiming exemption from Capital Gainsu/s 54B–

1. The exemption is available to an Individual or a HUF.

 2. The land which is being sold must have been used for agricultural purposes by the individual or
his parents or by the HUF for a period of two years immediately before the date of transfer.

3. Another land for the agricultural purpose(whether Rural or Urban) should be purchased within a
period of two years from the date of transfer of this land.

4. The new agricultural land which is purchased to claim capital gains exemption should not be
sold within a period of three years from the date of its purchase.

5. In case assessee is not able to purchase agricultural land before the date of furnishing of Income
Tax Return u/s 139 – the amount of capital gains must be deposited before the date of filing of
return in any bank or institution specified according to the Capital Gains Account Scheme, 1988.
The exemption can be claimed for the amount which is deposited.

6. If the amount which was deposited as per Capital Gains Account Scheme was not used for the
purchase of agricultural land – it shall be treated as the capital gain of the year in which the
period of two years from the date of sale of land expires.

Amount of exemption from Capital Gains u/s 54B– If cost of new Agricultural Land is equal or greater
than capital gains, then entire capital gains is exempt. Moreover, if cost of new Agricultural Land is less
than capital gains, capital gains to the extent of thecost of new agricultural land is exempt.