Owning land away from city limits may be a good idea to keep away from the madding crowd but not so much from taxes. As the penchant for a house with that green patch grows even in smaller cities, the income-tax department is mulling over enhancing the notified area under local urban development authority.
At present, capital gains tax is imposed if agricultural land is situated 8 km from the local limit of a municipality or a corporation. Otherwise, agricultural land is excluded from the list of capital assets given under Section 2 of the Income-Tax Act.
However, now some of the real estate transactions take place beyond the 8-km limit as there is a growing fetish among people for farmhouses or villas outside city limits. Farmland just outside city limits is not necessarily used for agricultural purposes.
People construct farmhouses that attract premium prices though the value of the property is understated. Some real estate builders were also buying large patches of land outside the city limits, bolstering their land banks. By catching the transactions and bringing them under tax net, the department will be able to plug the black economy, a department source said.
If the proposal to increase the radius goes through, it would mean that real estate transactions beyond the 8-km limit and within the new notified limit will attract capital gains tax.
On the peripheries of urban cities, agricultural land has been used as residential property and has attracted premium valuations and, hence, it is obvious the government wants to tax them and keep a check on tax evasion in such deals, Ernst & Young partner (direct tax) Amitabh Singh said.
The proposal was discussed at the recent chief commissioners conference of income tax. There is a growing concern in the department that the land deals just outside the 8-km radius are prone to large-scale evasion and increasing the radius will help the department in keeping a tab on this, the source said.
It is likely the government could double the notified urban limit in the finance bill this year or the new income-tax law, Direct Tax Code. Both the options would be explored, he said.
If the limit is increased, it would cover additional areas wherein development activity is being undertaken generally on the outskirts of the city limits, KPMG director Vikas Vasal said. Capital gains is levied at 20%.
Interestingly, some developers seem to be with the government on the move. If the city municipal limits get extended, tax compliance will go up significantly. The Centre would earn its share of revenue in the form of long-term capital gains tax and the states would increase the ambit of stamp duty, which would be charged in the new notified areas at circle rates, real estate major Ansal API CEO Anil Kumar said.
Real estate consultants also confer with the view. Definition of a city has changed a lot over the years. Now, more infrastructure and area are needed in order to support growing population and traffic. It would also lead to increased governance, and taxation is a part of it, Cushman & Wakefield executive MD (south Asia) Sanjay Verma said.