My two sisters and I inherited agricultural land from our father after his death. We intend to sell the land and distribute the proceeds among the three of us. What tax will be payable? Is there a way to avoid tax on the sale using Section 54?
—Name withheld on request
It is assumed that the agricultural land is urban agricultural land, located within the specified limits of a municipality or cantonment board, depending on its population. If the land is located beyond these specified limits, capital gains from its sale would not be taxable. It is also assumed that your father acquired the land at least two years before the intended sale and that all three of you are tax residents of India.
As the property is agricultural land, each of you may be able to claim an exemption under Section 54F (Section 86 of the Income Tax Act, 2025) to the extent the sale proceeds are reinvested in a residential house property. Alternatively, an exemption may be available under Section 54B (Section 83 of the 2025 Act) if the proceeds are used to purchase another agricultural land, assuming the inherited land was being cultivated by your father.
The three of you do not have to jointly reinvest the proceeds in a single residential property or parcel of agricultural land. Each of you can invest separately. However, for Section 54F, each person can claim the exemption for only one residential property.
The exemption under Section 86 is available provided you do not own more than one residential property, other than the new property, on the date of transfer of the agricultural land. If you purchase a residential property, the investment must be made within one year before or two years after the sale of the land.
If you construct a residential property, construction must be completed within three years of the sale. The amount eligible for exemption is capped at ₹10 crore.
For Section 54B, the investment in agricultural land must be made within two years of the sale of the inherited land. The newly acquired agricultural land must then be held for at least three years from the date of purchase.
You may also claim an exemption under Section 54EC (Section 85 of the Income Tax Act, 2025) by investing the capital gains in specified capital gains bonds. This exemption, however, is capped at ₹50 lakh.
If any capital gain remains taxable, you can choose to pay tax at 12.5%, plus applicable surcharge and education cess, on the gain computed without indexation, or at 20%, plus applicable surcharge and education cess, on the gain computed after applying indexation to the cost of acquisition.
For indexation purposes, the period for which your father held the land will also be taken into account. Similarly, the cost of acquisition will generally be the amount paid by your father for the land. If the land was acquired before 1 April 2001, you can instead use its fair market value as on 1 April 2001, subject to the applicable rules.
Mahesh Nayak, chartered accountant, CNK & Associates.