When your ancestral agricultural land, located within urban limits, gets compulsorily acquired by the government, you might think, "Now I have to pay capital gains tax too?" But hold on. Section 10(37) of the Income Tax Act steps in to offer significant relief!
What is Section 10(37)?
Section 10(37) provides tax exemption for capital gains arising from the compulsory acquisition of urban agricultural land. If the acquisition is done by the government & certain conditions are met, the entire capital gain is exempt from income tax. “
Let’s simplify this.
If you’re a Hindu Undivided Family (HUF) or an individual who owns agricultural land in an urban area, & that land is compulsorily acquired by the government, you don’t have to pay tax on the capital gains — provided you fulfil the specified conditions under this section.
Conditions to Qualify for Exemption under Section 10(37)
To claim this exemption, the following must apply:
- The land must be an agricultural land located in an area that is considered urban (i.e., within municipal limits or notified area).
- The land should have been used for agricultural purposes by the assessee or their parent/HUF in the last two years immediately before the date of transfer.
- The transfer must be through compulsory acquisition by the government or an authority under any law.
- Compensation must be received after April 1, 2004.
If these conditions are fulfilled, the capital gains arising on such transfer are not taxable.
Real-life Example:
Let’s say Ramesh owns a plot of urban agricultural land in Pune. The government compulsorily acquired this land in 2022 for a metro project. The land has been used to cultivate sugarcane for the past 3 years.
Now, normally, this would attract capital gains tax. But under Section 10(37), Ramesh’s gain is fully exempt, provided he receives the compensation after 1st April 2004 and meets all other criteria.
Capital Gain Exemption & Employer-Related Compensation
An interesting point that often confuses people — Section 10(37) is strictly for the exemption of capital gains, not for general compensation or employer reimbursements. However, in broader discussions under Section 10, other sub-sections (notably 10(14)) do provide exemptions for expenses incurred due to your employer’s business, such as travel allowances or daily expenses. “
But these two are separate reliefs. Don’t mix capital gains exemption with allowance exemptions.
Importance of Section 10(37)
- Encourages the retention of agricultural land until compulsory acquisition.
- Offers a financial cushion to farmers & landowners.
- Prevents undue taxation on compulsory government takeovers.
- Recognises urbanisation pressure on agriculture & ensures tax neutrality in such transitions.
Key Takeaways:
- Who benefits? Individuals & HUFs owning urban agricultural land.
- What is exempt? Capital gains from compulsory government acquisition.
- Since when? Applies if compensation is received after April 1, 2004.
- What’s required? Proof of agricultural usage in the previous two years & compulsory acquisition.
Common Questions Around Section 10(37)
- Is rural agricultural land covered under Section 10(37)?
A. No. Rural agricultural land is already exempt from capital gains under Section 2(14), so Section 10(37) specifically targets urban agricultural land acquired compulsorily. - What if the land wasn’t used for agriculture in the last 2 years?
A. Then you won’t be eligible under Section 10(37), and normal capital gains tax will apply. - Does voluntary sale to private developers qualify under Section 10(37)?
A. not. This section is only for compulsory acquisitions by the government or statutory authorities.
Final Word
Section 10(37) is a crucial tax relief for landowners caught in the crossfire of urban expansion & compulsory acquisition. If your family has agricultural roots and owns urban land that’s acquired by authorities, you don’t have to panic about the taxman showing up with a bill. This section provides tax exemption for capital gains, ensuring your compensation remains whole & untaxed, as long as you meet the eligibility requirements.
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