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Capital gains arising on sale of a rural agricultural land & on compulsory acquisition of an urban land are fully tax exempt!

      Section 2(14) of the Income-tax Act, which defines ‘capital asset,’ excludes from within its purview an agricultural land situated in India at a place having a population of less than 10,000 as per the last preceding census or at an area not comprised within any municipal limits or within a notified distance from such municipal limits. The Government notification in this regard has specified distances ranging between 2 to 8 kms for various towns situated in different states keeping in view the extent of urban development in the respective areas.

      If the agricultural land sold by a taxpayer does not qualify as a ‘capital asset’ on the basis of the above test, then it does not give rise to any taxable capital gains. Any agricultural land situated in any ‘urban area’ on the basis of the above guidelines being required to be treated as a ‘capital asset,’ any gains arising from the transfer of the same would be liable to tax as capital gains.

      However, with effect from Assessment Year 2005-06, a special exemption has been provided under Section 10(37) in respect of capital gains arising out of compensation or consideration received for any urban agricultural land on account of compulsory acquisition under law. This exemption is further subject to the condition that the land in question was used for agricultural purposes either by the individual or his parent or by his HUF during the period of 2 years immediately preceding the transfer.


      It needs to be noted, however, that even in such cases, while the amount of capital gains out of the award of compensation would be exempt, the compensation awarded in the form of interest would very much be taxable as ‘income from other sources’ in the hands of the taxpayer.

      As per the amendment to Section 145A as introduced by the Finance (No. 2) Act, 2009, with effect from Assessment Year 2010-11, interest received by a taxpayer on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.  However, as per the new provision made under Section 57(iv), it has also been provided that a deduction of a sum equal to 50% shall be allowed in respect of such income treated as taxable in the year of receipt.


      As per Section 2(14) of the Income-tax Act ‘personal effects,’ excluding jewellery, are not treated as capital assets and hence any gain arising on their transfer cannot be made liable to capital gains tax. ‘Personal effects’ would include movable property such as wearing apparel, furniture, household articles, utensils, vehicles, etc. held for personal use. Jewellery which has been excluded from ‘personal effects’ would include ornaments made of gold, silver, platinum or any other precious metal, precious or semi-precious stones and any articles set in any such stones.

      A motor car or any other conveyance held for the personal use of a taxpayer is also a personal effect and any profit or gain arising from the same cannot be charged to tax as capital gains. In this regard, one can rely on the decision of the Bombay High Court in the case of ‘CIT vs. Sitadevi N. Poddar’ 148 ITR 506(Bom.).

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