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

Section 54B: Capital Gain Tax on Sale of Agricultural Land. Capital Gain Tax on Sale of Agricultural Land can lead to significant tax liabilities. However, the Indian Income Tax Act offers relief through Section 54B. This section provides an exemption if the proceeds from selling agricultural land are reinvested into purchasing another agricultural land. Let's explore Section 54B, its conditions, applicability, exemption limits, and other important details.
What is Section 54B of the Income Tax Act?
Section 54B of the Income Tax Act provides a specific tax exemption to individuals and Hindu Undivided Families (HUFs) on Capital Gain on Sale of Agricultural Land. To qualify, the seller must reinvest the capital gains in purchasing another agricultural land within a specified timeframe.
Under this provision, the land sold must be agricultural land and should have been used for agricultural purposes by the individual, their parents, or HUF in the two years preceding the sale. Furthermore, the new agricultural land must be purchased within two years after the date of transfer. If the newly purchased land is sold within three years, the benefit previously claimed is revoked.
It is important to note that if the cost of the new land is less than the capital gain, the balance becomes taxable. This ensures that only genuine reinvestments into agricultural activity get the tax exemption benefit.
Who Can Claim Section 54B Deduction?
Not everyone is eligible to claim benefits under Section 54B. Only individuals and Hindu Undivided Families (HUFs) are allowed to seek exemptions on Capital Gain on Sale of Agricultural Land. Private Limited Companies/Public Companies, partnerships, LLPs, or any other corporate bodies are excluded.
The land sold must qualify as agricultural land used for agricultural purposes. It can be either a long-term capital asset (held for more than 24 months) or a short-term capital asset (held for 24 months or less).
Importantly, the land must have been used for agriculture by the seller, their parents, or the HUF during the two years immediately before the date of sale. The new agricultural land purchased must also be situated within India. In cases where the land is compulsorily acquired by the government, the two-year purchase condition starts from the date of receipt of compensation.
What is the Amount of Exemption Available Under Section 54B?
The exemption under Section 54B is calculated based on the lower of two values:

The amount of capital gain from the sale.
The cost of purchasing new agricultural land.

Let's understand with an example. Suppose Mr. Sunil sold his agricultural land for Rs. 60 lakhs in FY 2023-24. The land was bought in FY 2016-17 for Rs. 30 lakhs. Using the Cost Inflation Index (CII) for 2023-24, the indexed acquisition cost would be Rs. 39,54,545. Therefore, his Long-Term Capital Gain amounts to Rs. 20,45,455. Mr. Sunil then purchased another agricultural land for Rs. 45 lakhs.
Since the purchase cost exceeds the capital gain, the exemption will be Rs. 20,45,455, the amount of actual capital gain. This way, Mr. Sunil effectively avoids paying tax on his capital gain by reinvesting in agricultural land.
How is Exemption Calculated in Case of Sale of Agricultural Land?
The exemption under Section 54B comes with a three-year lock-in period. If the new agricultural land bought using the capital gains is sold within three years, different consequences arise depending on the situation.

Situation 1: If the new agricultural land is sold within three years and the purchase cost is less than the original capital gain, the exemption stands revoked. The entire sale amount will become taxable without any deduction for the purchase price.
Situation 2: If the land is sold within three years but the purchase cost exceeds the capital gains, the exemption still gets revoked. However, the cost of acquisition for calculating fresh capital gains will be reduced by the earlier exemption claimed.
Situation 3: If the land is sold after three years from its purchase date, the initial exemption under Section 54B remains intact. Moreover, while calculating new capital gains, the seller is allowed to use the indexed cost of acquisition.

Understanding these situations helps in planning reinvestments wisely and ensuring that the benefit under Section 54B is not lost inadvertently.
What Happens to Exemptions When Agricultural Land is Sold?
The Capital Gain on Sale of Agricultural Land, if not properly planned, becomes taxable. To save on taxes, the seller must reinvest the proceeds in a new agricultural land within the stipulated time.
The gains are calculated by deducting the indexed cost of acquisition and expenses incurred during the sale from the sale consideration. Only if the seller meets the conditions laid down under Section 54B can they claim exemption and defer their tax liability.
It is important to ensure that the land sold and the land purchased are both classified as agricultural lands. Otherwise, the exemption claimed may be denied during assessment, leading to additional tax and penalties.
What is the Capital Gains Account Scheme (CGAS)?
Sometimes taxpayers may not be able to purchase a new agricultural land immediately after selling the old one. To safeguard their Section 54B exemption, they can deposit the required amount in a Capital Gains Account Scheme (CGAS) before filing their Income Tax Return.
The amount deposited in the CGAS can later be used to purchase the new agricultural land. However, if the deposited amount is not utilized within three years, it will be treated as taxable income and taxed as per applicable rates.
Opening a CGAS account is a smart move to ensure compliance and avoid unnecessary tax payments when there is a genuine delay in reinvestment.
How to Disclose Agricultural Land Sale in ITR?
Disclosure of the Capital Gain on Sale of Agricultural Land in Income Tax Returns (ITR) depends on whether the land is classified as rural or urban.

Sale of Rural Agricultural Land: Rural agricultural land is not treated as a capital asset under the Income Tax Act. Hence, gains from its sale are not taxable. Still, it is necessary to report the sale under 'Schedule EI' (Exempt Income) in the ITR.
Sale of Urban Agricultural Land: Urban agricultural land is considered a capital asset. Therefore, its sale must be reported under 'Schedule CG' (Capital Gains) of the ITR. The taxpayer can deduct the indexed cost of acquisition and any improvement costs to calculate the taxable capital gains. They can also claim exemptions under Sections 54B, 54EC, and 54F, if eligible.

Correct disclosure in the tax return ensures transparency and helps avoid notices or scrutiny from the Income Tax Department.
TDS Applicable on the Sale of Agricultural Land
Normally, under Section 194-IA, a 1% TDS is applicable on property transactions exceeding Rs.50 lakhs. However, the sale or purchase of agricultural land is exempt from this requirement.
This means even if the value of agricultural land exceeds Rs.50 lakhs, no TDS is deducted on the transaction. But, it is important that the land must qualify as agricultural land under the Income Tax Act.
Sellers must verify the classification of their land before the transaction to ensure that unnecessary TDS is not deducted or demanded during the registration process.
FAQs

Can companies or partnership firms claim Section 54B exemption?

No. Only individuals and Hindu Undivided Families (HUFs) are eligible to claim an exemption under Section 54B. Other entities like companies, LLPs, or firms cannot avail of this benefit.

Can I purchase more than one agricultural land to claim exemption under Section 54B?

The law does not restrict the number of agricultural lands purchased, as long as the reinvestment is made within two years and all other conditions are satisfied. However, the exemption amount is limited to the amount of capital gain or cost of new agricultural land, whichever is lower.

What happens if the land sold was not used for agricultural purposes in the two preceding years?

The exemption under Section 54B will not be available if the land sold was not used for agricultural purposes during the two years immediately preceding the date of transfer.

Is there any restriction on the location of the new agricultural land?

Yes. The new agricultural land must be purchased within India. Purchase of agricultural land outside India will not qualify for exemption under Section 54B.

Can I deposit only the capital gains or the full sale proceeds into the CGAS?

The taxpayer needs to deposit the entire amount of capital gains into the CGAS if they are unable to purchase new land before the ITR filing due date to claim full exemption.

What if the amount deposited in CGAS is not utilized within three years?

If the amount deposited in CGAS is not utilized for purchasing new agricultural land within three years, it will be treated as taxable income in the year when the three-year period expires.

How to calculate the indexed cost of acquisition?

To calculate the indexed cost of acquisition, the original purchase price is multiplied by the cost inflation index (CII) of the year of sale and divided by the CII of the year of purchase. This adjusted cost is then deducted from the sale proceeds to calculate capital gain.

Capital Gain Tax on Sale of Agricultural Land can lead to significant tax liabilities. However, the Indian Income Tax Act offers relief through Section 54B. This section provides an exemption if the proceeds from selling agricultural land are reinvested into purchasing another agricultural land. Let's explore Section 54B, its conditions, applicability, exemption limits, and other important details.

What is Section 54B of the Income Tax Act?

Section 54B of the Income Tax Act provides a specific tax exemption to individuals and Hindu Undivided Families (HUFs) on Capital Gain on Sale of Agricultural Land. To qualify, the seller must reinvest the capital gains in purchasing another agricultural land within a specified timeframe.

Under this provision, the land sold must be agricultural land and should have been used for agricultural purposes by the individual, their parents, or HUF in the two years preceding the sale. Furthermore, the new agricultural land must be purchased within two years after the date of transfer. If the newly purchased land is sold within three years, the benefit previously claimed is revoked.

It is important to note that if the cost of the new land is less than the capital gain, the balance becomes taxable. This ensures that only genuine reinvestments into agricultural activity get the tax exemption benefit.

Who Can Claim Section 54B Deduction?

Not everyone is eligible to claim benefits under Section 54B. Only individuals and Hindu Undivided Families (HUFs) are allowed to seek exemptions on Capital Gain on Sale of Agricultural Land. Private Limited Companies/Public Companies, partnerships, LLPs, or any other corporate bodies are excluded.

The land sold must qualify as agricultural land used for agricultural purposes. It can be either a long-term capital asset (held for more than 24 months) or a short-term capital asset (held for 24 months or less).

Importantly, the land must have been used for agriculture by the seller, their parents, or the HUF during the two years immediately before the date of sale. The new agricultural land purchased must also be situated within India. In cases where the land is compulsorily acquired by the government, the two-year purchase condition starts from the date of receipt of compensation.

What is the Amount of Exemption Available Under Section 54B?

The exemption under Section 54B is calculated based on the lower of two values:

The amount of capital gain from the sale.
The cost of purchasing new agricultural land.

Since the purchase cost exceeds the capital gain, the exemption will be Rs. 20,45,455, the amount of actual capital gain. This way, Mr. Sunil effectively avoids paying tax on his capital gain by reinvesting in agricultural land.

How is Exemption Calculated in Case of Sale of Agricultural Land?

The exemption under Section 54B comes with a three-year lock-in period. If the new agricultural land bought using the capital gains is sold within three years, different consequences arise depending on the situation.

Situation 1: If the new agricultural land is sold within three years and the purchase cost is less than the original capital gain, the exemption stands revoked. The entire sale amount will become taxable without any deduction for the purchase price.
Situation 2: If the land is sold within three years but the purchase cost exceeds the capital gains, the exemption still gets revoked. However, the cost of acquisition for calculating fresh capital gains will be reduced by the earlier exemption claimed.
Situation 3: If the land is sold after three years from its purchase date, the initial exemption under Section 54B remains intact. Moreover, while calculating new capital gains, the seller is allowed to use the indexed cost of acquisition.

Understanding these situations helps in planning reinvestments wisely and ensuring that the benefit under Section 54B is not lost inadvertently.

What Happens to Exemptions When Agricultural Land is Sold?

The Capital Gain on Sale of Agricultural Land, if not properly planned, becomes taxable. To save on taxes, the seller must reinvest the proceeds in a new agricultural land within the stipulated time.

The gains are calculated by deducting the indexed cost of acquisition and expenses incurred during the sale from the sale consideration. Only if the seller meets the conditions laid down under Section 54B can they claim exemption and defer their tax liability.

It is important to ensure that the land sold and the land purchased are both classified as agricultural lands. Otherwise, the exemption claimed may be denied during assessment, leading to additional tax and penalties.

What is the Capital Gains Account Scheme (CGAS)?

Sometimes taxpayers may not be able to purchase a new agricultural land immediately after selling the old one. To safeguard their Section 54B exemption, they can deposit the required amount in a Capital Gains Account Scheme (CGAS) before filing their Income Tax Return.

The amount deposited in the CGAS can later be used to purchase the new agricultural land. However, if the deposited amount is not utilized within three years, it will be treated as taxable income and taxed as per applicable rates.

Opening a CGAS account is a smart move to ensure compliance and avoid unnecessary tax payments when there is a genuine delay in reinvestment.

How to Disclose Agricultural Land Sale in ITR?

Disclosure of the Capital Gain on Sale of Agricultural Land in Income Tax Returns (ITR) depends on whether the land is classified as rural or urban.

Sale of Rural Agricultural Land: Rural agricultural land is not treated as a capital asset under the Income Tax Act. Hence, gains from its sale are not taxable. Still, it is necessary to report the sale under 'Schedule EI' (Exempt Income) in the ITR.
Sale of Urban Agricultural Land: Urban agricultural land is considered a capital asset. Therefore, its sale must be reported under 'Schedule CG' (Capital Gains) of the ITR. The taxpayer can deduct the indexed cost of acquisition and any improvement costs to calculate the taxable capital gains. They can also claim exemptions under Sections 54B, 54EC, and 54F, if eligible.

Correct disclosure in the tax return ensures transparency and helps avoid notices or scrutiny from the Income Tax Department.

TDS Applicable on the Sale of Agricultural Land

Normally, under Section 194-IA, a 1% TDS is applicable on property transactions exceeding Rs.50 lakhs. However, the sale or purchase of agricultural land is exempt from this requirement.

This means even if the value of agricultural land exceeds Rs.50 lakhs, no TDS is deducted on the transaction. But, it is important that the land must qualify as agricultural land under the Income Tax Act.

Sellers must verify the classification of their land before the transaction to ensure that unnecessary TDS is not deducted or demanded during the registration process.

FAQs

Can companies or partnership firms claim Section 54B exemption?

No. Only individuals and Hindu Undivided Families (HUFs) are eligible to claim an exemption under Section 54B. Other entities like companies, LLPs, or firms cannot avail of this benefit.

Can I purchase more than one agricultural land to claim exemption under Section 54B?

What happens if the land sold was not used for agricultural purposes in the two preceding years?

The exemption under Section 54B will not be available if the land sold was not used for agricultural purposes during the two years immediately preceding the date of transfer.

Is there any restriction on the location of the new agricultural land?

Yes. The new agricultural land must be purchased within India. Purchase of agricultural land outside India will not qualify for exemption under Section 54B.

Can I deposit only the capital gains or the full sale proceeds into the CGAS?

The taxpayer needs to deposit the entire amount of capital gains into the CGAS if they are unable to purchase new land before the ITR filing due date to claim full exemption.

What if the amount deposited in CGAS is not utilized within three years?

If the amount deposited in CGAS is not utilized for purchasing new agricultural land within three years, it will be treated as taxable income in the year when the three-year period expires.