Section 54B of Income Tax Act: Capital Gains Exemption on Sale of Agricultural Land

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Hiral Vakil

Capital Gains Exemption
Income Heads
Income Tax
Section 54B
Last updated on March 1st, 2024

When a farmer shifts from one agricultural land to another, the intention is not to earn income out of it but to acquire another suitable land. If such a farmer is liable to pay income tax on the capital gains on the sale of agricultural land, there would be a hardship for them. Thus, to benefit such farmers the Income Tax Act has given a Capital Gain Exemption under section 54B of the Income Tax Act on the sale of one agricultural land and purchase or construction of another 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:

  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 that the taxpayer sells is a Long Term Capital Asset i.e. land sold after 24 months or Short Term Capital Asset i.e. land sold within 24 months
  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. Taxpayer purchases new agricultural land within 2 years from the sale of the old agricultural land
  5. The 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.

The taxpayer can claim the Capital Gains Exemption under Section 54B while filing 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 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 2021-22 for Rs. 60,00,000. He had purchased in FY 2016-17 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:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*317/264) (36,02,272)
Long Term Capital Gains 23,97,728
New House Property Purchase Price 45,00,000
Section 54B Exemption Amount 23,97,728
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 in the case of sale of Agricultural Land?

The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54B of income tax act. And the following situations can 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 house 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 house purchased is more than 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.

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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 or construction of new property till the due date of submission of ITR, then he/she should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim exemption of amount already spent on construction or purchase of property 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

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.