Section 54B: Capital Gain Exemption on Sale of Agricultural Land

Exemption under section 54B of Capital Gain on sale of agricultural land provides for relief to taxpayers in the form of exemption from capital gain income whether short term or long term capital gain.

After fulfilling conditions required in this section you can avail the benefit of exemption and can save the capital gain tax.

In the following, we have explained the conditions for availing exemption under section 54B of Income Tax Act, 1961:

 

What is exemption under section 54B of Income Tax Act?

As per section 54B, assesse has to pay capital gain tax (long term / short term) upon any gain arising on transfer of agricultural land.

But Government has given relief in the form of an exemption. It means on fulfillment of certain conditions you can avail exemption under section 54B in the form of deduction from capital gain and can save tax.

 

Who is eligible to avail exemption under section 54B?

Exemption under section 54B [exemption in case of transfer / sale of agricultural land] can be availed by Individual or HUF.

Company, Firm etc. can not avail the benefit of this section.

 

What are the conditions to be fulfilled for availing exemption under section 54B?

If you want to avail benefit under section 54B and want to reduce tax liability then you have to fulfill the following conditions:

• The exemption is available only if the agricultural land transferred (sale) is an urban agricultural land, which is used (by assesee or his parents) for agricultural purposes in 2 years immediately preceding the date of transfer.
• Upon transfer of agricultural land, two types of gain can arise and it can be short term capital gain or long term capital gain. So this exemption is available in both the cases.

Reinvestment Conditions:

• It is an important condition which needs to be fulfilled. Capital gain arises from transfer of agricultural land that needs to be reinvested in purchase of any other agricultural land.
• That agricultural land can be in rural or urban area and it must be for agricultural purposes.
• And that land must be purchased within 2 years after the date of transfer of agricultural land.

Also Read: Capital Gain Tax on Sale of Property (Long Term / Short Term)

What is the amount of exemption available under section 54B?

You can avail exemption to the extent of invested amount. But the exemption must be maximum upto the amount of short term / long term capital gain.

Example:

If Mr. X sells its agricultural land for Rs. 60 lakhs and capital gain arises of Rs. 20 lakhs and if Mr. X invest all amount of capital gain i.e. Rs. 20 lakhs in purchase of new agricultural land then he can avail exemption of amount Rs. 20 Lakhs.

But if he invest Rs. 30 Lakhs on purchase of new agricultural land then in such case exemption is available only to the extent of capital gain i.e. Rs. 20 Lakhs only.

Also Read: Section 54: Exemptions on capital gain on transfer of residential property

 

What is the provision of withdrawal of exemption?

Once you purchased new agricultural land and you have availed exemption under this section then you must not transfer such new agricultural land within 3 years.

If you transfer within 3 years then exemption you have taken shall be withdrawn. Exemption will be reversed in the year in which you transfer the new land by reducing the amount of exemption from the cost of acquisition of land.

Example:

Mr. X has availed exemption earlier for Rs. 40 Lakhs on sale of agricultural land and purchase new agricultural land for Rs. 50 lakhs. Now as per the provision of section 54B that land must not be transferred within 3 years.

But Mr. X transferred such new land within 1 year for Rs.70 Lakhs then in such case exemption allowed earlier will be reversed while calculating the capital gain on transfer of new land.

Particulars	Amount Rs.
Full value of consideration (-) Cost of acquisition [50 lakhs – 40 lakhs ( exemption earlier allowed]	70 Lakhs (10 Lakhs)
Capital Gain	60 Lakhs

Now Mr. X has to pay tax on Rs. 60 lakhs. But if he retains that land and sells it after 3 years then his exemption will not be reversed then in such case his gain will be Rs. 20 Lakhs (70 lakhs – 50 lakhs).

Also Read: Capital Gain Tax - Long Term & Short Term in India

What is the provision of Capital gain account scheme 1988 under section 54B?

• It is a scheme for the benefit of taxpayers. Your gain is taxable in the year in which transfer took place but the period given for purchase of new land is 2 years. So for availing exemption this scheme is introduced.
• Under this scheme the amount of capital gain arising on transfer has to be utilized (invested in purchase of new land) till the last date of filing of return. If this is not possible then you should deposit the amount of capital gain in the capital gain account scheme, 1988.
• That amount should be used for the specific use i.e. purchase of agricultural land only.
• If you misutilise the amount then it will be considered short term / long term gain in the year in which amount is misutilised.
• On expiry of a period of 2 years if any amount remains unutilized then it will also be considered your short term / long term gain in the year in which time period expired.

Also Read: Income Tax Slab Rates: Individual, Senior Citizens (FY 2021-2022)

Summary

Under Section 54B of Income Tax Act for exemption on capital gain arise from transfer / sale of agricultural land, you can avail exemption by fulfilling conditions and can save capital gain tax.