Section 54B of the Income Tax Act, 1961 provides a significant tax exemption for individuals and Hindu Undivided Families (HUFs) who sell agricultural land. The exemption applies to capital gains arising from such a sale, provided the taxpayer uses the proceeds to purchase another agricultural land within a specified time frame. This reinvestment requirement helps ensure that the capital gain is used to further agricultural activities. By offering this exemption, the government aims to encourage farmers and landowners to reinvest in the agricultural sector, supporting its growth and development. The provision thus not only provides tax relief but also fosters long-term investments in agricultural land.
Who can Claim an Exemption Under Section 54B of the Income Tax Act?
A taxpayer can claim exemption u/s 54B if they fulfill all the below conditions:
- The taxpayer must be an Individual or HUF. The benefit of exemption u/s 54 is not available to the company, LLP, or Firm.
- The taxpayer sells agricultural land, which qualifies as either a Long Term Capital Asset (land sold after 24 months) or a Short Term Capital Asset (land sold within 24 months).
- The agricultural land sold is used for agricultural purposes by the individual / his parent / HUF as the case may be for 2 years before transfer.
- Taxpayer purchases new agricultural land within 2 years from the sale of the old agricultural land
- The new agricultural land should be in India
period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.
period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.
The taxpayer can claim the Capital Gains Exemption under Section 54B while filing an ITR for that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.
What is the Amount of Exemption available Under Section 54B?
As mentioned above, the Amount of Exemption under Section 54B will be the least of the following:
- The Cost of new Agricultural land,
- The Capital Gains on the Sale of Agricultural Land.
Example: Palak sold agricultural land during the financial year 2023-24 for INR 60,00,000, which she had purchased in the financial year 2016-17 for INR 30,00,000. Subsequently, she acquired a new agricultural land valued at INR 45,00,000. Palak will be eligible to claim a deduction under section 54B as follows:
| Particulars | Amount (INR) |
| Sales Consideration | 60,00,000 |
| Less: Indexed Cost of Acquisition (30,00,000*348/264) | 39,54,545 |
| Long Term Capital Gains | 20,45,455 |
| New Agricultural Land Purchase price | 45,00,000 |
| Section 54B Exemption amount | 20,45,455 |
What Happens to Exemption in the case of sale of Agricultural Land?
The lock-in period of 3 years applies when a taxpayer claims an exemption under Section 54B of the Income Tax Act, and the following situations may arise:
Situation 1
When the taxpayer sells the new agricultural land within 3 years from the date of purchase and the cost of a new asset purchased is less than Capital Gains.
Consequences: The exemption under Section 54B is withdrawn and the total sales value of agricultural land will be taxable as capital gains. Here the cost of acquisition will be NIL.
Situation 2
When the taxpayer sells the new agricultural land within 3 years from the date of purchase and the cost of a new asset is more than the Capital Gains.
Consequences: The exemption under Section 54B is withdrawn. However, a taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54B) while calculating capital gains.
Situation 3
When the taxpayer sells the new agricultural land after 3 years from the date of purchase or construction.
Consequences: The exemption u/s 54B is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Long Term Capital Gains on agricultural land sold.
What is the Capital Gains Account Scheme (CGAS)?
If a taxpayer is unable to utilize the whole or part of the sales consideration for the purchase of new agricultural property till the due date of submission of ITR, then they should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim exemption of amount already spent on the purchase of land along with the amount deposited in CGAS.
However, it is important to note that if the taxpayer is unable to utilise the amount deposited in the Capital Gains Account Scheme within the time limit of 3 years, then it shall be taxable as income of the last year.
FAQs
No. In order to claim exemption u/s 54B, the land purchased has to be in the name of the seller. The exemption is not available if new land is purchased in the name of the spouse.
Yes, NRI can claim exemption u/s 54B of the Income Tax Act. Provided the agricultural land sold and purchased is situated in India.
Yes. Capital gain arising from compulsory acquisition of agricultural land under any law and the consideration of which is approved by the central government or RBI received on or after 01/04/2004 is fully exempt from tax. It is exempt u/s 10(37) of the income tax act.