Realty Deals may Gain Ground in Small Towns

Finance Bill 2013 has refined the distance and population criteria for determining agricultural land as a capital asset

Land sharks,builders and corporates looking to buy land parcels around smaller towns and cities will find it easier to cut deals now.The Finance Bill 2013 that has refined the distance and population criteria for determining agricultural land as a capital asset will allow more such transactions around smaller towns with population of less than 10 lakh without any capital gains tax levy.According to Census 2011 provisional data,there are more than 450 such cities including Noida,Greater Noida,Gurgaon,Mathura,Panvel,Mira-Bhayander,Bhiwandi,Guwahati,Siliguri and Jamnagar with population between 1 lakh and 10 lakh.The proposed amendment provides that a plot will be treated as agriculture land if it is situated out of 8 kilometers of local limits of municipality if population of this town or city is more than 10 lakh.For a town with population of 1 lakh to 10 lakh,the limit is set at 6 kilometers,while for a locality with less than 1 lakh population,the limit is 2 kilometers.The existing provisions make no categorisation of cities and towns based on population and provide uniform limit of 8 kilometers for defining capital assets or non-agricultural land parcel.But with proposed revised distance and population criteria,sellers will be able to save nearly 20% of tax outgo on gains.The amendment also clarifies that aerial distance would be considered while measuring the distance.Earlier,it was a negative statement capturing what was excluded from the definition of capital assets,but now it has been reversed to talk about what can be included as agricultural land.The seller will be able to save long term capital gains tax of 20% under exemption if the transaction follows all other rules of Income Tax Act, says Sagar Madan,tax partner,Khare Legal Chambers.The benefit will accrue the most in tier II and III cities and towns where the population is between 1 lakh and 10 lakh.Land buyers and sellers around these towns will be able to claim exemption from long-term capital gains tax for their land parcels situated beyond 6 kilometers.According to earlier provisions,sellers of land situated up to 8 kilometers in these places would have been liable to pay tax as the rule had not provided any further categorisation.In this case,the land parcel, even if it is situated 7 kilometers away from the town limit,would have been considered as capital assets and hence the instance of capital gains tax.However,it may not be an easy task to buy these land parcels.Unless the land parcel fulfils the licensing conditions,the builder will not be able to go ahead with his realty development plans on it;he will have to get required licensing clearances beforehand.Until then such land buying will only be in anticipation of change in zoning, says Neeraj Bansal,director,Real Estate and Construction,KPMG.Sellers will be able to avail exemption for a land parcel beyond the stated limits even if they are not using the plots to carry out agricultural activity if the transaction is categorised in the nature of sale of land,Bansal said.However,if the land parcel has already seen a change in usage for commercial activity,then it will be considered as capital asset and therefore will attract capital gains tax.The transactions are likely to factor the lesser tax incidence on the seller and,therefore,may be finalised now at a lower rate,as the seller usually tries to retrieve his tax burden also through the final consideration.

Fresh Plot

Proposed Amendment

A land parcel will be treated as agricultural land if it is situated beyond 8 kms of municipal limit and if the population of this town or 
city is more than 10 lakh For a town with a population of 1 lakh to 10 lakh,the limit is set at 6  kms,while for a locality with less than 1 lakh population,the limit is 2 kms

The Impact

With proposed revised distance and population criteria,sellers will be able to save nearly 20% of tax outgo on gains. The benefi t will accrue the most in tier II and tier III cities and towns where the population is 1-10 lakh.

Economic Times, New Delhi, 07-03-2013