When does inherited agricultural land sale get tax exemption?

A taxpayer who inherited agricultural land 40 to 50 years ago faces a specific question when selling it: does the sale qualify for capital gains tax exemption? The answer depends on whether the land counts as a capital asset under the Income-tax Act, 2025, according to Parizad Sirwalla, partner and head of global mobility services at KPMG in India.

Agricultural land in India is not a capital asset unless it meets certain location and use criteria. Only land that falls outside specified municipal limits or is not used for agricultural purposes may be treated as a capital asset. If the land does not meet these criteria, the sale proceeds are not subject to capital gains tax at all.

Assuming the land qualifies as a capital asset, the 40-50 year holding period – including that of previous owners – makes it a long-term capital asset. Gains are taxed as long-term capital gains.

The popular exemption under Section 54 of the old Act, now Section 82 of the new Act, applies only to gains from the sale of a residential house. Agricultural land does not qualify for this deduction.

Section 54F (Section 86 of the new Act) provides relief for long-term capital gains from any asset other than a residential house. If the net sale consideration is invested in a residential house in India within the specified timeline, and other conditions are met, the gain may be exempt.

Separately, Section 54B (Section 83 of the new Act) applies when the land was used for agricultural purposes by the taxpayer or their parent. The sale proceeds must be reinvested in another agricultural land within the prescribed period.

Sirwalla noted that the applicability of these exemptions depends on the specific facts, including the land's use and the taxpayer's intent. The new Act is effective from assessment year 2026-27.