Agricultural Income – Tax Treatment

In India, agricultural income refers to income earned from sources that include farming land, renting agricultural land and selling agricultural  produce. As India is basically an agrarian economy, several incentives and perks are there, for those making a living through agriculture. Farmers are, for instance, exempt from paying any tax on their agriculture income under the income tax laws in India. However, not all income generated from agricultural land, qualify as agricultural income. Therefore, it’s pertinent to know the difference between incomes that fall in the agricultural category and the non-agricultural category

What is Agricultural Income?

Agricultural income as per section 2(1A) of the Income Tax Act, 1961 is as follows.

According to this Section, agricultural income generally means:

  • Rent or revenue derived from land:
    • Any rent or revenue derived from land which is situated in India and is used for agricultural purposes
  • Income derived from such land by agriculture operations:
    • The meaning of agriculture though not covered in the Act has been laid down by the Supreme Court in the case CIT v. Raja Benoy Kumar Sahas Roy where agriculture has been explained to consist of two types of operations:
      • Basic operations – The basic operations would include cultivation of the land and consequently sowing of seeds, planting, etc wherein human effort involved in producing crops
      • Subsequent Operations – The subsequent operations are operations for growth and preservation of the produce like weeding, digging soil around the crops grown etc. Also, those operations make the produce marketable like tending, pruning, cutting, harvesting, etc
  • Income from sale of agricultural produce:
    • Where the produce does not undergo ordinary processes to become marketable, the income arising on sale would generally be partly agricultural income and part of it will be non-agricultural income. The Income Tax has prescribed rules to bifurcate agricultural and non agricultural produce for various products
  • Income derived from saplings or seedlings:
    • Any income derived from saplings or seedlings grown in a nursery shall be agriculture income too. Moreover, No tax liability arises on the income generated through sale of products grown in a nursery provided:
      • Assessment of land revenue by the local
      • The land should not be within the jurisdiction of a municipality or a cantonment board where the revenue is not not subject to local rate
  • Income attributable to a farm house
    • Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).
      • The building should be on agricultural land or in immediate vicinity of the agricultural land, or
      • The land should not be located within the following region:
Aerial distance from municipality* Population as per last preceding census
Within 2 kms 10,000 to 1,00,000
Within 6 kms 1,00,000 to 10,00,000
Within 8 kms > INR 10,00,000

*Municipality includes municipal corporation, notified area committee, town area committee, town committee and cantonment board.

Note: Even where the local population is < 10,000, the land should also not be situated within the jurisdiction of the local municipality or cantonment board.

Non-agricultural income

As mentioned earlier, certain agriculture-related works and the income thus generated, is categorized as non-agricultural income and is taxable.

  • Heavy processing: 
    • When an agricultural produce undergoes a process to become marketable, the final product is categorised as non-agricultural. For example, the production of tea, coffee, rubber, etc. Also, if a farmer sells processed items without carrying out any agricultural or processing operations, the income would be categorised as business income
  • Breeding of livestock: 
    • This includes dairy animals, fishery and poultry farming on agricultural land
  • Tree plantation: 
    • Trees grown on farmland only to be used as timber, fall in the non-agriculture category, as no active agricultural business has been concluded in the entire process
  • Trading: 
    • Those who earn their income by trading agriculture produce, have to pay standard taxes on their income
  • Export: 
    • Income earned from the export of agriculture produce, could be exempt from IT if certain conditions are met

Tax Calculation with Agricultural Income

Income from agriculture is exempt from tax under section 10(1) of the Income Tax Act, 1961. However, the Income-tax Act has laid down a method to indirectly tax such income. This method or concept may be called as the partial integration of agricultural income with non-agricultural income. This method is applicable when the following conditions are met:

  • Income from agriculture should be more than INR 5,000.
  • Also, Total income for the financial year, excluding agriculture income, should exceed INR 2,50,000. This limit will increase to 3,00,000 in case of individual who is above 60 and less 80 and will be 5,00,000 for individual who is above 80.

Calculation of Agricultural Income

In case, Agriculture income exceeds INR 5,000 and there are other sources of income too, then, the tax liability for that year is to be calculated following the procedure as under:

  • Compute income tax on the aggregate income (i.e. agricultural income + other income) as per the prevailing income tax rates.
  • Compute income tax on sum of amount of basic exemption limit plus agriculture income as per the prevailing income tax rates.
  • Now, Compute (1) – (2) to arrive at the tax liability for the year.

Example

Suppose, taxpayer has 4,00,000/- as interest income and 90,000/- as agriculture income for the assessment year 2019-20. The computation shall be as follows:

  • Calculate tax on total income of INR 4,90,000
Particulars Amount (INR)
Tax on INR 2,50,000 Nil
Tax on remaining INR 2,40,000 @ 5% 12,000
Total Tax 12,000

 

  • Calculate tax on basic exemption limit + agriculture income i.e.
Particulars Amount (INR)
Tax on INR 2,50,000 Nil
Tax on remaining INR 90,000 @ 5% 4,500
Total Tax 4,500*

The tax liability, in this case, shall be Rs. 7,500 (a-b) i.e. INR 12,000 – INR 4,500 and there’s no extra tax payable owing to the extra income of agriculture.

Section 54B: Capital Gain on Transfer of Land used for Agricultural Purpose

Section 54B of the Income Tax Act, 1962, provide relief to individuals who sell their agricultural land and buy another agricultural land from that sale. The following conditions must be met in order to claim benefit under section 54B:

  • This benefit can only be claimed by individuals or HUF.
  • The agricultural land must be used specifically for agricultural purpose.
  • The individual or his/her parents must use this land for agricultural purpose for at least two years immediately preceding the date on which the exchange of land occurred. In the case of HUF, any member of the HUF must use this land for agricultural purpose.
  • After selling agricultural land, the assessee will have to buy another agricultural land within two years from the date of selling.
  • In case of compulsory acquisition, the period of acquiring new agricultural land will be assessed from the date of receipt of compensation. 
  • The entire amount of capital gains must be utilized for the purchase of agricultural land if not then the difference will be termed as capital gains and the tax will be computed accordingly.
  • The new agricultural land must not be sold within the period of 3 years from the purchase.

Which ITR is applicable for Agricultural Income

If the aggregate agricultural income of the assessee is up to Rs. 5,000 disclose the agricultural income in the income tax return (ITR) 1. But if the agricultural income exceeds Rs. 5,000, then form ITR 2 applies

Moreover, Agricultural income exceeding Rs 5 lakh is to be reported separately for each agricultural land under the ‘exempt income schedule’ along with additional details such as the name of the district with pin code, measurement of land, whether owned or leased, and whether irrigated or rain-fed.

FAQs

Is agricultural income wholly exempt from income tax?

If income of assessee is less than 5000 and total income, excluding agriculture income is less than the basic exemption limit then only agricultural income exempt from income tax.

What is not considered as agricultural income in India?

Following are not considered as agriculture income
1. Breeding of livestocks
2. Dairy farming
3. Fisheries
4. Poultry farming

Does the income from business of growing tea is an agriculture Income?

In case of growing of tea 40% income is taxable as business income and balance will be exempt as agriculture income.

DTAA – Double Taxation Avoidance Agreement : Definition, Types, and Benefits

For NRIs who are working in other countries, the DTAA (Double Taxation Avoidance Agreement) helps to avoid paying double taxes on income earned in both their country of residence and India. Its key objective is that tax-payers in these countries can avoid taxation for the same income twice. India has 85 active agreements. The basic objective of DTAA is to promote and foster economic trade and investment between two Countries by avoiding double taxation. You can check the DTAA entered into by India with other countries from the income tax department’s website through this link Notification of Government.

What is DTAA?

DTAA means a Tax Treaty between two or more countries to avoid taxing the same income twice. When a person is residing in one country and earning income in some other country they are covered under DTAA. This means that involved countries have agreed upon tax rates and jurisdictions for income arising from their country.

For example, Mr. Arjun is an Indian residing in the UK. He has made investments in India on which he earns returns. Now, this Income can be taxable in both India and the UK. But because of DTAA, Mr. Arjun will not be taxed in both countries for the same income.

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Types of DTAA

Relief from Double Taxation can be provided in two ways:

  • Bilateral Treaties: When there is an agreement of DTAA between the Two countries relief is calculated according to mutual agreement between such two countries. Bilateral relief can be granted by either of the following methods:
    • Exemption method: Under this method, income is taxed in only one country
    • Tax credit:  Income is taxed in both countries. Relief is granted in the country in which the taxpayer is the resident.
  • Unilateral Relief: The home nation provides relief when there is no mutual agreement between the countries 

Nature of DTAA

  • Comprehensive: Comprehensive DTAA’s are those which cover almost all types of incomes covered by any model convention. Many a time a treaty covers wealth tax, gift tax, surtax. Etc. too.
  • Limited: Limited DTAA’s are those which are limited to certain types of incomes only.

Advantages of DTAA

  • The intent behind a Double Tax Avoidance Agreement is to make a country appear as an attractive investment destination by providing relief on dual taxation.
  • This relief is provided by exempting income earned in a foreign country from tax in the resident nation or offering credit to the extent taxes have been paid abroad.
  • Reducing the possibility of tax evasion in both or either of the signatory countries
  • Tax rate concessions
  • Lower Withholding Tax: Lower withholding tax is a plus for taxpayers as they can pay lower TDS on their interest, royalty, or dividend incomes in India.

Treatment of Double Taxation Avoidance Agreement

There are two ways of implementing DTAA:

  1. By either exempting the income earned abroad in its entirety
  2. By providing credit to the extent of tax already paid in the other country

Continuing the example, as Mr. Arjun is covered under DTAA. And the agreement states that the UK will exempt his entire income earned on investments made in India then he has to pay taxes only in India and not the UK. Only one particular country will charge his income.

Now, let’s say that the agreement states that India and the UK both will charge taxes on that income. In that case, Mr. Arjun will get a credit of the taxes paid by him in the UK which will be deducted while paying taxes in India. So he will end up paying taxes in both countries but at lowered rates.

The Governments of different countries enter into Double Taxation Avoidance Agreements to provide reliefs to the tax-payers and encourage more investments.

How can NRI claim benefit of DTAA?

Non resident Indians residing in any of the DTAA countries can avail of tax benefits provided under DTAA by timely submission of the following documents every financial year within the due dates:

  • TRC (Tax Residency Certificate): You need to submit TRC to claim benefits under DTAA. To obtain a TRC, you can approach the tax/government authorities of your current residence country, where you would get TRC certified, upon downloading form 10F.
  • Form 10F: You need to submit form 10F to avail benefits under DTAA.
  • PAN number: You also need to submit your PAN (Permanent Account Number) along with the above documents to get tax benefits.
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How to apply for DTAA?

The process of application of DTAA involves a series of steps, involving the different types of provisions.

  • Determine whether the issue is within the scope of the convention.
  • Check that the treaty applies to the tax in issue – is it a tax listed in Article 2 (or a tax substantially similar to such a tax).
  • Thirdly, check that the treaty is in force for the taxable period in issue.

How is Double Taxation Avoidance Agreement relief calculated?

In case there is DTAA with the Country, then Tax Relief can be claimed u/s 90. Steps to compute Double Taxation relief:

  1. Calculate Global Income i.e. aggregate of Indian income and Foreign income;
  2. Compute tax on such global income as per the slab rates applicable;
  3. Calculate the average rate of tax (i.e. Global income divided by the amount of tax);
  4. Compute an amount by multiplying Foreign income with such average rate of tax;
  5. Compute Tax paid in Foreign country

The amount of relief shall be lower of (4) and (5).

In case there is No DTAA, then Tax Relief can be claimed u/s 91. Steps to compute relief:

  1. Compute tax payable in India
  2. Compute lower of Indian rate of tax and rate of tax in Foreign country
  3. Multiply the rate obtained in Step 3 by the doubly taxed income.

Relief will be the amount as computed in Step 3.

List of countries that have DTAA with India

India has signed a Double Tax Avoidance Agreement with most major nations where Indians reside. Following is the list of some of the major countries:

Country DTAA TDS rate
United States of America 15%
United Kingdom 15%
Canada 15%
Australia 15%
Germany 10%
South Africa 10%
New Zealand 10%
Singapore 15%
Mauritius 7.5% to 10%
Malaysia 10%
UAE 12.5%
Qatar 10%
Oman 10%
Thailand 25%
Sri Lanka 10%
Russia 10%
Kenya 10%

FAQ

Who is covered under DTAA?

Individuals who are residing in one country and earning any income from another country are covered under the Double Taxation Avoidance Agreement (DTAA).

How do I take DTAA benefits?

Individuals who are NRIs are covered under DTAA. They are required to submit their “Tax Residency Certificate (TRC)” to the deductor (Bank) along with Form-10F & PAN No.

How many countries have DTAA with India?

India has Double Taxation Avoidance Agreements (DTAA) with a total of 88 countries out of which 86 are presently in force.

What are the details should contains in TRC?

TRC should contain the following details:
– Name of the assessee.
– Status of the assessee (Individual, Firm, Company Etc.)
– Nationality
– Country
– Assessee Tax Identification or Unique Identification number of the relevant Country
– Residential status for the purpose of tax
– Validity Period of the certificate
– Address of the applicant

Capital Gain Exemption

Capital Gain Tax arises on the sale of Capital Asset by a taxpayer. The Income Tax Act allows a total / partial exemption from Capital Gain under different sections. However, the capital gain exemption amount can not exceed the total amount of capital gain. Following are the most common capital gains exemptions:

A taxpayer can claim the exemption while filing ITR for that particular financial year. An individual 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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List of Capital Gain Exemption

The Income Tax Act has defined the particular sections under which exemptions can be claimed on capital gains earned. The intention of the exemption is to allow the taxpayer to invest in a new Capital Asset within a specified time limit without any tax burden.

Section Description Applicability Deduction Amount
54 Sale of House Property (LTCA) by Individual/HUF Purchase/Construction of New House Property. Lower of
Cost of New House Property
OR
Capital Gains
Purchased 1 year before or 2 years after the sale of a property.
Constructed within 3 years from the sale of a property.
54F Sale of Long Term Capital Asset (LTCA) other than house property by Individual/HUF Purchase/Construction of New House Property. Cost of new asset * Capital Gains / Net Consideration
Purchased 1 year before or 2 years after the sale of a property.
Constructed within 3 years from the sale of a property.
54EC Sale of Land or Building or both (LTCA) by any taxpayer Investment in NHAI/REC Bonds.  Lower of
Cost of Investment 
OR
Capital Gains
An investment made within 6 months from the sale of an asset. 
The investment amount can not be more than Rs. 50 lakhs. 
54B Sale of Agricultural Land (LTCA/STCA) by Individual/HUF Purchase of new Agricultural Land.  Lower of
Cost of New Agricultural Land 
OR
Capital Gains
Purchased within 2 years from the sale of land. 
Land sold must be used for agriculture purposes for 2 years prior to sale. 
54D Compulsory acquisition of land and building (LTCA) used in an industrial undertaking Purchase of land or building for shifting or re-establishing the industrial undertaking.  Lower of
Cost of New Asset
OR
Capital Gains
Purchase within 3 years from the date of compulsory acquisition. 
Land/Building acquired must be used for industrial undertaking purposes for 2 years prior to transfer. 
54E, 54EA, 54EB Sale of any LTCA by any taxpayer Investment in Specified Securities.  Cost of new asset * Capital Gains / Net Consideration
Specified securities include Government Securities, Savings Certificates, Units of UTI,  Specified Debentures, etc. 
An investment made within 6 months from the sale of an asset. 
54EE Sale of any LTCA by any taxpayer Investment in units of a specified fund. The investment amount can not be more than Rs. 50 lakhs.  Cost of new asset * Capital Gains / Net Consideration
Specified fund include units notified by the central government 
An investment made within 6 months from the sale of an asset.
54G Sale of plant, machinery, land,  building, or rights to land, building situated in an Urban Area used in the industrial undertaking.   Purchase of new plant, machinery, land, building in Rural Area.  Lower of
Cost of New Asset
OR
Capital Gains
Purchased within 1 year before and 3 years after the sale of assets. 
The asset sold can be LTCA or STCA. 
54GA Sale of plant, machinery, land,  building, or rights to land, building situated in an Urban Area used in the industrial undertaking.   Purchase of new plant, machinery, land, building in SEZ.  Lower of
Cost of New Asset
OR
Capital Gains
Purchased within 1 year before and 3 years after the sale of assets. 
The asset sold can be LTCA or STCA. 

 

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FAQs

How to claim exemption if we wish to buy the house property next year?

Taxpayer can claim exemption u/s 54, 54F depending on asset sold. An exemption can be claimed by putting the amount in Capital Gains Account Scheme (CGAS) before the due date of filing of ITR in the year of sale. And claim the same as exemption while filing ITR.

Can we claim exemptions on sale of Short Term Capital Asset(STCA)?

The taxpayer can claim exemption u/s 54B and 54G on Short Term Capital Asset. However, all the other exemptions are available on Lond Term Capital Asset.

What are the documents required as proof of investment while claiming exemption?

While filing ITR, taxpayer only needs to enter the exemption section, required details of purchased asset and amount of exemption claimed. However, it is important to keep the purchased assets documents on record for future use.

Section 54B : Exemption on Sale of Agricultural Land

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 10th January 2021.

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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:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*289/220) (39,40,909)
Long Term Capital Gains 20,59,091
New House Property Purchase Price 45,00,000
Section 54B Exemption Amount 20,59,091
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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 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 Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

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.

Section 54EC of the Income Tax Act

Exemption under section 54EC of the Income Tax Act is available on Capital Gains on sale of any long term capital asset being land or building or both and invested in NHAI or REC Bonds. The amount of Exemption under Section 54EC will be lower of:

  1. The Cost of NHAI/REC Bonds,
  2. The Capital Gains on the sale of land or building.

A taxpayer can claim this Capital Gains Exemption while filing ITR in 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 10th January 2021.

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Budget 2018 Update

The proposed amendment u/s 54EC in the budget 2018 has inter alia proposed an amendment to Section 54EC. The government has proposed to amend the section by restricting its scope only to capital gains arising from long term capital assets, being land or building, or both. Furthermore, it is also proposed to provide the long term specified asset, for making any investment under the section on or after the 1st day of April 2018 shall mean any bond, redeemable after five years against the earlier three years and issued on or after 1st day of April 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf.

This amendment is to take effect from the 1st of April 2019. It will apply in relation to the AY 2019-20 and subsequent assessment years.

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

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

  1. Any assessee can claim exemption u/s 54EC. Therefore, an Individual, HUF, Company, LLP, Firm, etc can claim this exemption.
  2. The asset sold is a Long Term Capital Asset (LTCA) being Land or Building or Both. The asset is long Term if it has been held for more than 24 months.
  3. Capital Gains are invested within 6 months from the date of transfer.
  4. Investment can be made in the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), or Any Other Bonds notified by the Central Government.
  5. The investment amount can not be more than Rs. 50 lakhs during the current and succeeding financial year.
From FY 2018-19, Investment in NHAI/REC bonds are redeemable after 5 years as against earlier 3 years as per Budget 2018.
Tip
From FY 2018-19, Investment in NHAI/REC bonds are redeemable after 5 years as against earlier 3 years as per Budget 2018.

What is the Amount of Exemption Available Under Section 54EC of the Income Tax Act?

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

  1. The Cost of NHAI/REC Bonds,
  2. The Capital Gains on the sale of land or building.
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Example: Jay sold land in FY 2019-20 for Rs. 60,00,000. It was purchased in FY 2013-14 for Rs. 30,00,000. And Jay purchased NHAI bonds for Rs. 45,00,000 in FY 2019-20. Jay will be able to claim deduction under section 54EC as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*289/220) (39,40,909)
Long Term Capital Gains 20,59,091
NHAI Bonds Price 45,00,000
Section 54EC Exemption Amount 20,59,091
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What happens to exemption if bonds are sold?

The lock-in period of 5 years is applicable when exemption u/s 54EC of the income tax act is claimed. And the following situations can arise:

Situation 1:

When bonds are sold within 5 years from the date of purchase.

Consequences: The exemption u/s 54EC is withdrawn. And the amount of exemption availed will be reduced from the cost of the asset. And Capital Gains will be the total sales value minus the cost of the asset.

Situation 2:

When bonds are sold after 5 years from the date of purchase.

Consequences: The exemption u/s 54EC is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains on bonds sold.

FAQs

Can I invest in Capital Gains Account Scheme (CGAS) and claim exemption u/s 54EC?

No. The Benefit of investing in CGAS is not available under section 54EC. The taxpayer needs to invest in bonds within 6 months of the date of transfer of asset.

Can NRI Claim exemption u/s 54EC?

Yes, NRI can claim exemption u/s 54EC of the Income Tax Act. Provided the land or building sold is situated in India.

What will be the tax rate on capital gains earned if exemption u/s 54EC is not claimed?

LTCA are taxed at special rates. Land and Building are considered as movable assets and taxed at 20% with Indexation.

Section 54F of the Income Tax Act

Exemption under section 54F of the Income Tax Act is available on Capital Gains on sale of any long term capital asset other than house property and invested in purchase/construction of house property. The amount of Exemption under Section 54F will be lower of:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains.

A taxpayer can claim this Capital Gains Exemption while filing ITR in 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 extended to 10th January 2021 (in case tax audit is not applicable).

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

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

  1. The taxpayer must be an Individual or HUF. The benefit of exemption is not available to the company, LLP, or Firm.
  2. The asset sold is a Long Term Capital Asset (LTCA) other than House Property.
  3. On the date of sales, the taxpayer does not own more than one house property.
  4. A new Residential House is purchased before 1 year or after 2 years from the sale of the long term capital asset, or
  5. In case of construction of a new House Property, within 3 years from the sale of the residential House Property.
  6. A new Residential House should be in India.

What is the Amount of Exemption Available Under Section 54F of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54F will be available as per the following formula:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains.

Example: Ajay sold gold in FY 2019-20 for Rs. 15,00,000. It was purchased in FY 2012-13 for Rs. 5,00,000. And Ajay purchased his second house property for Rs. 35,00,000 in FY 2019-20. Ajay will be able to claim deduction under section 54F as follows:

Particulars Amount
Sales Consideration 15,00,000
Less: Index Cost of Acquisition (5,00,000*289/200) (7,22,500)
Long Term Capital Gains 7,77,500
New House Property Purchase Price 35,00,000
Section 54F Exemption Amount (35,00,000*7,77,500/15,00,000) = 18,14,167 or 7,77,500 7,77,500
Refer Index Cost from here.
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54F of the Income Tax Act.
Tip
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54F of the Income Tax Act.

What Happens to Exemption if New House Property is Sold?

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

Situation 1

When a new house is sold within 3 years from the date of purchase/construction.

Consequences

The exemption u/s 54F is withdrawn. And the amount of exemption availed will be reduced from the cost of the asset. And Capital Gains will be the total sales value minus the cost of the asset.

Situation 2

When a new house is sold after 3 years from the date of purchase/construction.

Consequences

The exemption u/s 54F is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains Tax on sale of house property sold. And capital gains will be taxed at 20%.

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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 Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

FAQs

What is Net Consideration u/s 54F?

Net Consideration is the full Sales value/consideration received on sale of Long Term Capital Asset reduced by any expense incurred in connection with the transfer.
Net Consideration = Sales Value – Transfer Expenses.

Can NRI Claim exemption u/s 54F?

Yes, NRI can claim exemption u/s 54F of the Income Tax Act. Provided the LTCA sold and house property purchased is situated in India.

What will be the tax rate on capital gains earned if exemption u/s 54F is not claimed?

LTCA are taxed at special rates. It depends on the type of asset sold.
Movable Asset: 20% with Indexation,
Shares/Securities: 10% u/s 112A (above Rs. 1,00,000).

Section 54 of the Income Tax Act – Capital Gains Exemption

Exemption under section 54 of the Income Tax Act is available on Capital Gains on sale of one house property and purchase/construction of another house property. The amount of Exemption under Section 54 will be lower of:

  1. The Cost of new Residential House Property
  2. The Capital Gains on the sale of a property

A taxpayer can claim the Capital Gains Exemption under Section 54 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 10th January 2021.

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

A taxpayer can claim exemption u/s 54 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 asset sold is a Long Term Capital Asset (Sold after 24 months).
  3. The asset sold is a Residential House Property. And any income earned from this property was shown under the head “Income From House Property”.
  4. A new Residential House is purchased before 1 year or after 2 years from the sale of the residential House Property, or
  5. In case of construction of a new House Property, within 3 years from the sale of the residential House Property.
  6. A new Residential House should be in India.
From FY 2019-20, a taxpayer can claim exemption u/s 54 in respect of investment made in 2 residential house properties. However, The exemption for the investment made, by way of purchase or construction, in 2 residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. This option can be exercised only once in a lifetime.
Tip
From FY 2019-20, a taxpayer can claim exemption u/s 54 in respect of investment made in 2 residential house properties. However, The exemption for the investment made, by way of purchase or construction, in 2 residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. This option can be exercised only once in a lifetime.

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

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

  1. The Cost of New Residential House Property OR
  2. Capital Gains arising on the sale of a property.

Example: Ravi sold a house property in FY 2019-20 for Rs. 60,00,000. The property was purchased by him in FY 2013-14 for Rs. 30,00,000. And he purchased a new house property worth Rs. 45,00,000 in another city. Ravi will be able to claim deduction under section 54 as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*289/220) (39,40,909)
Long Term Capital Gains 20,59,091
New House Property Purchase Price 45,00,000
Section 54 Exemption Amount 20,59,091
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 House Property is Sold?

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

Situation 1:

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

Consequences: The exemption u/s 54 is withdrawn. And the total sales value of new house property will be taxable as capital gains. Here the cost of acquisition will be NIL.

Situation 2:

When a new house is sold within 3 years from the date of purchase/construction and the cost of a new house purchased is more than Capital Gains.

Consequences: The exemption u/s 54 is withdrawn. However, a taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54) while calculating capital gains.

Situation 3:

When a new house is sold after 3 years from the date of purchase/construction.

Consequences: The exemption u/s 54 is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains Tax on sale of house property. And capital gains will be taxed at 20%.

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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 Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

FAQs

Can I claim exemption if I buy new property in the name of my spouse?

No. In order to claim exemption u/s 54, the property purchased has to be in the name of the seller. The exemption is not available if a new property is purchased in the name of the spouse.

Can NRI claim exemption u/s 54 on House Property purchased?

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

Is exemption allowed if the builder of a property fails to hand it over within 3 years?

Yes. The exemption is still allowed to the taxpayer u/s 54. Even when the builder of a property fails to hand it over to him.

Form 61A : Annual Information Return (AIR)

Some individuals need to file Form 61A to justify their High Value Transactions, you can track the status of this filing on the TIN-NSDL website. Entities such as Banks and other Financial Institutes are responsible to furnish certain transaction details through Form 61A (AnnualInformation Return). Hence, with an aim to curb black money and to track high-value transactions, the government has implemented new reporting guidelines. Therefore, “High valued transaction” of Individuals and Businesses are monitored u/s 285BA of The IncomeTax Act.

Form 61A contains details of the transaction and reportable account maintained by the specified persons during the Financial Year. The Income Tax Department using AIR monitors these High valued transactions.

Who should file Form 61A (AIR)?

According to the section 285BA of the Income Tax Act, 1961, “Specified persons” are required to record and report “High-value financial transactions” of individuals and file Form 61A, upon receipt of notice. For instance, these specified persons can be:

  • Individuals and Taxpayers
  • Banks
  • Mutual funds
  • Institutions issuing bonds and registrars or sub-registrars

Detailed information on who should file Form 61A (AIR) as per the Tax Information Network (TIN) is as follows:

Sr. No.

 

Class of Person

Nature and value of the transaction

Clarification by Central Board of Direct Taxes vide circular

 

1.

 

Banking Company to which the Banking Regulation Act, 1949 applies.

 

Cash deposits of any person totaling to Rs. 10,00,000 or more in a year in the savings account of any bank.

 

The total of all the cash deposits in the savings account of a person should be reported as one single transaction. However, the date of the transaction should be the last date of the financial year.

 

 

2.

 

Banking Company to which the Banking Regulation Act, 1949 applies or any other Company or Institution issuing the credit card.

 

 

If credit card payments against a person are Rs.2,00,000 or more in a financial year.

 

The total of all the payments by a person to the credit card company should be reported as one transaction. And hence the date of the transaction is to be the last date of the financial year.

 

3.

 

trustee of a Mutual Fund or such other person managing the affairs of the Mutual Fund as may be duly authorized by the trustee in this behalf.

 

 

This is if you are acquiring any units of fund amounting to Rs. 2,00,000 or more in a financial year.

 

The amount actually received from the transacting party and not the amount relating to the allotment is to be reported.

 

4.

 

Company or Institution issuing bonds or debentures.

 

This is if you are acquiring any bonds or debentures amounting to Rs.5,00,000 or more in a financial year by the Company or institution.

 

 

The amount actually received from the transacting party and not the amount relating to the allotment is to be reported.

 

5.

 

Company issuing shares through public or rights issue.

 

If you are acquiring any shares of a company amounting to Rs. 1,00,000 or more

 

 

The amount actually received from the transacting party and not the amount relating to allotment is to be reported.

 

6.

 

Registrar or Sub Registrar appointed under section 6 of the Registration Act, 1908.

 

If you are purchasing or selling any immovable property that values Rs.30,00,000 or more in a financial year

 

Certain situations where the transaction of property valued at Rs. 30,00,000 involves joint parties and value for one or more parties is less than Rs. 30,00,000.

In such situations, all such transactions are to be reported even though the value of transaction in the hands of one or more of the joint parties is less than the threshold limit.

 

 

7.

 

An officer of the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934 who is duly authorized by the Reserve Bank of India in this behalf.

 

 

This is applicable if you are acquiring any bonds issued by the RBI amounting to Rs. 5,00,000 rupees or more in a year

 

The total of all the receipts from a person is required to be reported as one transaction and the date of the transaction is to be mentioned as the last date of the financial year.

Circumstances under which Form 61A is rejected

AIR may be rejected due to the following reasons:

  • Filers have to mention the filer’s name, TAN, PAN, Form number and the Current Financial Year. Any mismatches with the form and file submitted will end up in rejection.
  • If the return file provided on Computer media is not generated by the AIR FVU.
  • When you don’t file Form 61A (Part A) in the physical paper format along with the AIR file.
  • When your Form 61A (Part A) is not duly signed or verified.
  • Overwriting on Form 61A (Part A) not approved by the person who has signed the same.
  • When you use more than one computer to file the AIR. Also, when computer media finds your submission corrupted or with any viruses.
  • If you compress the AIR file using any other compression utilities than Winzip 8.1 or ZipItFast 3.0 or higher version.
  • Mismatch of the total in Form 61A with the total of SAM (Statement Acceptance Module) at the TIN Facilitation Centre.

Consequences of not submitting Form 61A on Time

Tax authorities of India, under section 285BA (5) can issue a notice to a specified person asking them to file Form 61A (Annual Information Return) within a period of 30 days from the date of receiving the notice. If they fail to file the statement within the allotted time then they will face a penalty of INR 1,000 per day after the date mentioned in the notice for furnishing the statements.

Steps to file Form 61 (AIR)

  1. Visit the TIN-NSDL website

    Download your AIR Return Preparation Utility (RPU) provided through NSDL

  2. Next you download your AIR RPU

    This is how your downloaded AIR RPU form will look like

  3. You need to fill in the required details in the given sheets under the downloaded excel file

    Post downloading the form

  4. Next you need to download the E-AIR FVU application

    To do this you need to download the latest JAVA software

  5. After setting up the application, you can now upload your excel sheet there

    If your file has any errors, the application will generate errors through the error file path. All errors need to be cleared in order to have the file accepted.

  6. Your accepted file needs to be copied on a CD or a Floppy

    Lastly, you need to visit the TIN-NSDL AIR section and skip to the 5th step and download Part A of Form 61A

  7. Next, visit your nearest TIN Facilitation Center (TINFC) and file your AIR return

    Now that you have your file on a CD or a Floppy and have your Part A of Form 61A filled.

Track Form 61A Filing Status

  • Visit the Tax Information Network Portal and click on services and select Annual Information Return from the dropdown
  • Select “AIR status view for filers
  • Enter your PRN and valid TAN

FAQs

What is File Validation Utility (FVU)?

FVU created by NSDL is a program to verify the format of AIR submitted by filers and to measure its accuracy.
FVU will accept AIR submissions only if it is error-free. If there are any errors in the details an error code and error description and details about the error will be displayed.
You can resubmit your form after correcting the errors. If there remains no error in filing AIR then the “File Validation Successful” message pops up.

How does the Income Tax Department (ITD) come to know about my “High value Transactions”?

If any Individual/Business makes a Financial Transaction which can be considered as “High value Transactions”, then the Bank and other Financial Institutes are responsible to report the transaction to the ITD, along with the registered PAN of that Person. Hence, ITD can come to know about your “High valued Transactions”

What are the Forms required for AIR?

AIR can be furnished through Form 61A (Part B) in a digitized form in a CD/Floppy. While Form 61A (Part A) in a paper format duly signed.

Income Tax Intimation under section 143(1)

Intimation received u/s 143(1) is not a Notice but a communication received from the income tax department. Once the assessee files his income tax return, the income tax department does a preliminary assessment. This includes verifying arithmetical errors, any incorrect claim in the return, the difference in tax calculation, verification of tax payment etc. This letter basically matches the calculations in the Income Tax Return filed with the calculations computed by the income tax department.

Intimation u/s 143(1)

How will I receive Intimation u/s 143(1)?

Communication on Email

  • The system auto-generates the intimation u/s 143(1) and communicates to the assessee on the email entered while filing the income tax return
  • The sender of these email is CPC i.e. Central Processing Centre and the sender’s email is intimations@cpc.gov.in
  • The subject of the email is ‘Intimation U/S 143(1) for PAN BCFxxxxx8D AY:2019-20‘. The PAN and AY (Assessment Year) would be different in each case
  • The intimation is attached to the email in a pdf format. It is password protected. The password to open is PAN in lower case and the date of birth in ddmmyyyy format. Eg: aagpr1212a02101980 for PAN: AAGPR1212A and DOB: 02/10/1980

Communication on SMS

  • The system auto-generates the intimation u/s 143(1) and communicates to the assessee on the mobile entered while filing the income tax return
  • The sender of the message is CPC i.e. Central Processing Centre and the sender’s name is VM-ITDCPC

Time Limit for issue of Intimation u/s 143(1)

The income tax department can send intimation u/s 143(1) within one year from the end of the financial year in which the return is filed.

Example

Taxpayer files ITR for FY 2018-19 in July 2019 or October 2019
End of financial year in which return is filed – 31st March 2020
One year from end of financial year – 31st March 2021
Therefore, intimation for ITR of FY 2018-19 can be sent up to 31st March 2021

If a taxpayer does not receive any intimation within such period, it means that there are no adjustments and changes to the ITR filed. There is no change in tax liability or refund. Thus, the Income Tax Return filed is deemed to be intimation u/s Section 143(1).

Action to be taken against Intimation u/s 143(1)

Action Reason
No Action required Calculation in the ITR filed matches with the calculation as per income tax i.e. No Demand & No Refund
No action required. Refund would be credited to your bank account Tax payable as per ITR filed is more than the tax payable as per income tax calculation i.e Refund
File Revised Return u/s 139(5) If you observe any mistakes in the ITR filed
Pay Demand and File Response (within 30 days) Tax payable as per ITR filed is less than the tax payable as per income tax calculation i.e. Outstanding Demand – If you Agree
File Rectification Request u/s 154 Tax payable as per ITR filed is less than the tax payable as per income tax calculation i.e. Outstanding Demand – If you Disagree

FAQs

There is no mismatch, no additional demand and no refund in the intimation u/s 143(1), what should I do?

The income tax department has successfully processed the income tax return. You can simply ignore the notice. No further action is required.

Is income tax notice u/s 143(1) different from notice u/s 143(1)(a)?

Communication u/s 143(1) is just an intimation and not a notice. Under this intimation, there is a preliminary check whether the calculations as per ITR match with the calculations as per tax department.
If there is any mismatch in the data, the department issues a notice for adjustment u/s 143(1)(a) The taxpayer needs to respond to this notice within 30 days.

Two months have passed since the e-verification of my ITR for F.Y. 2018-19, but I have not received the Intimation u/s 143(1). What should I do?

You can check your ITR status online on Income Tax Portal. In case, it has been processed then you can request for reissue of intimation online and you will receive it on your mail after request. If your ITR has not been processed by the department till now then either wait for the ITR to be processed or submit a grievance. Sometimes the department takes longer to process the return.

What happens if I do not respond to the intimation within 30 days of receiving the intimation?

In case, if we do not respond within 30 days (thirty days) of the issue of this intimation, the return of income will be processed after making necessary adjustment(s) u/s 143(1)(a) of Income Tax Act, 1961 without providing any further opportunities in this matter.

Is intimation u/s 143(1) and tax assessment order the same?

No, tax assessment order and intimation are not the same.

Do I need to reply to a 143(1) intimation, if I have 0 refunds and 0 tax demand, and proper sync on the taxpayer and 143(1) section columns?

No, you are not required to reply if everything is as per the details submitted by you in your ITR. It means the department has accepted the return as filed without carrying out any adjustments to it.

Form 10BA : Claim Deduction under section 80GG

What is Form 10BA?

Form 10BA is a declaration to be filed by a taxpayer who wants to claim deduction under section 80GG for rent paid on rental property. In order to claim deduction u/s 80GG following two conditions should be satisfied:

  1. ​The taxpayer should not be receiving HRA from an employer AND,
  2. ​The taxpayer, his spouse, minor child or if the assessee is a member of HUF, then the HUF should not own any self-occupied residential accommodation.

If both the above conditions are satisfied, then the taxpayer can submit a declaration in Form 10BA. A taxpayer should submit Form 10BA before filing ITR.

Other important ITR documents include: Form 16, Form 26AS, Form 12BB, Form 15G & Form 15H.

  • Taxpayer’s Name and PAN,
  • Address of rental property,
  • Rent paid,
  • Name and Address of Landlord.
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Example

During FY 2019-20, Arun was employed for the first 6 months and after that, he started doing freelancing work. Arun stayed at rented premises during the entire year. During his employment he received HRA. He does not own any self-occupied house property.

In the above scenario, Arun is eligible to claim deduction under section 80GG and can file Form 10BA for the last 6 months’ rent paid by him. Since he was not receiving any house rent allowance during that time and he did not own any self-occupied property.

How to submit Form 10BA?

A taxpayer has to submit the form online from his/her e-filing account on IT Department website.

  1. Go to the Income Tax e-Filing Portal

    Log in to the e-filing account from the e-filing portal.

  2. Navigate to e-file > Income Tax Forms

    It is right next to the My Account tab.

  3. Select FORM NO. 10BA from the drop-down, select the relevant Assessment Year

    Select Submission Mode as Prepare and Submit Online and click Continue.

  4. Enter the details like Name of Landlord, Details of Rent Paid etc.

    Preview and submit

What are the details required in Form 10BA?

Following details are required:

It is advisable to submit Form 10BA before filing income tax return and claiming deduction under section 80GG.

FAQs

Can I claim a deduction on rent paid if House Rent Allowance forms part of my salary?

No. As per primary conditions, you can not claim a deduction on rent paid if you receive an allowance from your employer. In this case, only HRA is allowed as deduction.

I am a freelance and I stay in rented premises, can I claim a deduction under section 80GG and file Form 10BA?

Yes, you can file Form 10BA. Provided you, your spouse, a minor child or your HUF does not own any self-occupied residential accommodation.

When can I claim deduction under section 80GG?

You can claim deduction u/s 80GG while filing your ITR. However, Form 10BA needs to be filed before filing ITR.