Section 54B : Exemption on Sale of Agricultural Land

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Hiral Vakil

Capital Gains Exemption
Income Heads
Income Tax
Section 54B

Exemption under section 54B of the Income Tax Act is available on Capital Gains on sale of agricultural land and purchase of new agricultural land. The amount of Exemption under Section 54B will be lower of:

  1. The Cost of new Agricultural land,
  2. The Capital Gains on the sale of Agricultural land.

A taxpayer can claim the Capital Gains Exemption under Section 54B exemption while filing ITR for that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 30th November 2020.

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Who can Claim an Exemption Under Section 54B of the Income Tax Act?

A taxpayer can claim exemption u/s 54B if all the below conditions are satisfied:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption u/s 54 is not available to the company, LLP, or Firm.
  2. The agricultural land sold is a Long Term Capital Asset (Sold after 24 months) or Short Term Capital Asset.
  3. The agricultural land sold is used for agricultural purposes by the individual / his parent / HUF as the case may be for 2 years prior to transfer.
  4. New Agricultural land is purchased within 2 years from the sale of the agricultural land.
  5. A new Agricultural land should be in India.
In case of compulsory acquisition the period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.
Tip
In case of compulsory acquisition the period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.

What is the Amount of Exemption available Under Section 54B of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54B will be least of the following:

  1. The Cost of new Agricultural land,
  2. The Capital Gains on the sale of Agricultural land.

Example: Palak sold agricultural land in FY 2019-20 for Rs. 60,00,000. The same was purchased in FY 2013-14 for Rs. 30,00,000. And she purchased a new agricultural land worth Rs. 45,00,000. Palak will be able to claim deduction under section 54B as follows:

ParticularsAmount
Sales Consideration60,00,000
Less: Index Cost of Acquisition (30,00,000*289/220)(39,40,909)
Long Term Capital Gains20,59,091
New House Property Purchase Price45,00,000
Section 54B Exemption Amount20,59,091
Refer Index Cost from here.
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
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Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
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What Happens to Exemption if New Agricultural Land is Sold?

The lock-in period of 3 years is applicable when exemption u/s 54B of the income tax act is claimed. And the following situations can arise:

Situation 1

When new agricultural land is sold within 3 years from the date of purchase and the cost of a new house purchased is less than Capital Gains.

Consequences: The exemption u/s 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 new agricultural land is sold within 3 years from the date of purchase and the cost of a new house purchased is more than Capital Gains.

Consequences: The exemption u/s 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 new agricultural land is sold after 3 years from the date of purchase/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.

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What is the Capital Gains Account Scheme (CGAS)?

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase/construction of new property till the due date of submission of ITR, then it should be deposited in the Capital Gains Deposit Account Scheme. Taxpayer can claim exemption of amount already spent on construction/purchase of property along with the amount deposited in CGAS.

Keep in mind, if the amount deposited in the CGAS is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

Similar exemption u/s 54EC is available when any Long Term Capital Asset is sold and bonds of NHAI/REC are purchased.
Know all about how to claim exemption u/s 54EC and save taxes on Capital Gain earned.
Read More
Similar exemption u/s 54EC is available when any Long Term Capital Asset is sold and bonds of NHAI/REC are purchased.
Know all about how to claim exemption u/s 54EC and save taxes on Capital Gain earned.
Read More

FAQs

Can I claim an exemption if I buy new agricultural land in the name of my spouse?

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.

Can NRI claim exemption u/s 54B on land purchased?

Yes, NRI can claim exemption u/s 54B of the Income Tax Act. Provided the agricultural land sold and purchased is situated in India.

Is capital gain exempt in the case of compulsory acquisition of agricultural land by the government?

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.

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