ITR 2025: Know The Tax Rules On Selling Agricultural Land – Exemptions, Rural vs Urban & Capital Gains Explained

For millions of Indian families, agriculture continues to be a vital part of their livelihood. Even as urban migration increases, many households retain ties to agricultural roots—often owning plots of farmland. As the ITR 2025 filing season approaches, individuals earning from agricultural activities or selling agricultural land must understand the applicable tax rules, exemptions, and capital gains implications under the Income Tax Act.

Agricultural Income: What’s Taxable and What’s Not?
Income earned from agricultural operations is exempt from tax under Section 10(1) of the Income-tax Act. This exemption applies to all types of taxpayers—individuals, Hindu Undivided Families (HUFs), companies, and firms. However, if agricultural income exceeds Rs 5,000, it must still be included in the total income for the purpose of rate applicability.

Mr. Deepak Kumar Jain, Founder and CEO of TaxManager, elaborates: “Under Section 10(1) of the IT Act, the agricultural income earned by individuals, HUFs, companies, firms, and all other entities will not be included in total income for tax calculations. Agricultural income is to be treated as exempted income.”

Such income should be disclosed in Schedule EI (Exempt Income) while filing ITR 2025.

Capital Gains on Agricultural Land: Rural vs Urban Classification
For capital gains tax purposes, agricultural land in India is classified into two types:
Rural Agricultural Land
Urban Agricultural Land
The classification directly impacts taxability.

Manmeet Kaur, Partner at Karanjawala & Co. -

Q1. The exemption under Section 10(1) of the Income-tax Act for agricultural income.

Amongst others, the following are the benefits of the exemption under Section 10(1) of the Income-tax Act for agricultural income: 
The primary benefit is that income derived from agricultural activities in India is fully exempt from central income tax which means that income tax to the central government on legitimate agricultural income is not required to be paid. Further, this exemption aims to provide financial relief to farmers and encourage agricultural growth and productivity.

Q2. The tax implications on the sale of urban agricultural land, including the distinctions between rural and urban land.

Response: Rural agricultural land is not classified as a capital asset under the Income-tax Act, and hence, any profit arising from its sale is not subject to tax. Although such income is exempt under Section 10(1), it must be disclosed in Schedule EI of the Income Tax Return. In contrast, the sale of urban agricultural land is taxable under capital gains. This distinction has been incorporated in the Act, keeping in view the social and economic differences between land situated in rural and urban areas.

Q3. Strategies taxpayers can use to save on income tax when selling agricultural land, such as Section 54B, 54EC, and 54F exemptions.

To save income tax on the sale of urban agricultural land, taxpayers can utilize specific sections of the Income Tax Act: Section 54B allows individuals and HUFs to exempt capital gains by reinvesting them into another agricultural land within two years; Section 54EC enables all taxpayers to exempt long-term capital gains by investing up to ₹50 lakh in specified bonds within six months; and Section 54F permits individuals and HUFs to exempt long-term capital gains by reinvesting the net sale consideration into a new residential house property within prescribed timelines

Rural Agricultural Land – No Capital Gains Tax
Any gains from the sale of rural agricultural land are not chargeable to tax under the head ‘Capital Gains’ since rural land is excluded from the definition of a capital asset as per Section 2(14)(iii) of the Act.

“Agricultural land in rural areas in India is not considered a capital asset under section 45 of the Income-tax Act,1961,” says Mr. Vivek Jalan, Partner at Tax Connect Advisory Services LLP.

“Therefore, any gains from its sale are not taxable under the head 'Capital Gains'. Since Rural agricultural Land is not a capital asset as per the definition of the Income-tax Act, any gains arising from the same are not taxable.”

According to the Income Tax Department’s definition, rural land is one that
Lies outside the municipal limits of towns with a population over 10,000, and Is located:
More than 2 km from a municipality with a population between 10,001 and 1,00,000
More than 6 km from a municipality with a population between 1,00,001 and 10,00,000
More than 8 km from a municipality with a population exceeding 10,00,000

Urban Agricultural Land – Capital Gains Apply

If the land lies within the above municipal limits, it is considered urban agricultural land—a capital asset, and its sale triggers capital gains tax.

“Urban Agricultural Land is a capital asset, and the sale of such assets needs to be disclosed in Schedule CG in ITR,” Mr. Jalan adds.

Capital gains on urban agricultural land can be either short-term or long-term:
Short-term capital gains (STCG): If the land is held for less than 2 years, it is taxed as per the individual's income slab.
Long-term capital gains (LTCG): If the land is held for more than 2 years, it attracts a 20% tax with indexation if sold before July 23, 2024. If sold after July 23, 2024, it will be taxed at 12.5% without indexation.

How to Save Tax on the Sale of Urban Agricultural Land

Several tax-saving provisions exist for individuals and HUFs selling urban agricultural land.

1. Section 54B – Reinvestment in Agricultural Land
Under this section, capital gains from selling agricultural land can be exempt if:
The seller purchases another agricultural land within 2 years of the sale.
The new land is used for agricultural purposes.
Applicable only to Individuals and HUFs.

“Section 54B states that capital gains is exempted on sale of agricultural land. The seller must purchase another agricultural land within 2 years of sale,” said Jain.

2. Section 54F – Investment in Residential Property
If the taxpayer doesn’t want to reinvest in agricultural land, Section 54F allows capital gains exemption if the amount is invested in a residential house within:
1 year before, or
2 years after the sale of the agricultural land
This benefit is available only if the taxpayer:
Does not own more than one residential property (excluding the new one)
Constructs a new house within 3 years, or buys one within 2 years

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“Section 54F states that to save capital gains earned on sale of capital assets the assessee must invest in residential property within 2 years,” Jain added. “If the assessee owns more than 1 residential property, he cannot claim exemptions under Section 54F.”

3. Section 54EC – Investment in Tax-Saving Bonds
Under Section 54EC, taxpayers can invest LTCG from urban agricultural land into specified bonds issued by:
National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC)

Key points:
Investment must be made within 6 months of sale
Maximum investment: ₹50 lakh

“Section 54EC states that the assessee should invest the capital gains amount in Tax Saving Bonds issued by NHAI or REC within 6 months of sale of land,” said Jain.

ITR 2025: What You Need to File
When filing your Income Tax Return for AY 2025-26, keep these reporting points in mind:
Agricultural income goes in Schedule EI
Capital gains on urban land go in Schedule CG
Ensure accurate classification of the land—urban or rural—based on geographical distance and population criteria
Retain purchase and sale deeds, land classification proof, and investment documents for exemptions

As ITR 2025 filing gains pace, understanding whether your agricultural land sale qualifies for capital gains tax or not—and how to legally save taxes—is essential. From exemptions under Sections 10(1) and 54B to strategic investments under 54EC and 54F, taxpayers have multiple avenues to optimise their tax outgo. But these exemptions require meticulous compliance and documentation.
 

If you're planning to sell your agricultural land—or already have—make sure you classify the land correctly and leverage the appropriate sections to report or save capital gains in your ITR.