Section 54B of the Income Tax Act, 1961 provides a tax relief to individuals and Hindu Undivided Families (HUFs) on capital gains earned from selling agricultural land. To benefit from this exemption, taxpayers must reinvest the proceeds from the sale into purchasing new agricultural land within a prescribed period. This guide explains the details of Section 54B, its eligibility, exemption amount, and more.
What is Section 54B?
Section 54B of the Income Tax Act allows individuals to claim an exemption from capital gains tax when the proceeds from selling agricultural land are reinvested into purchasing a new agricultural land.
- Section 54B provides tax exemption on capital gains from the sale of agricultural land.
- Eligibility: Available to individuals and Hindu Undivided Families (HUFs).
- Condition: The agricultural land must be used for farming by the seller or their family for at least 2 years before the sale.
- Reinvestment: The capital gains must be reinvested in purchasing new agricultural land within 2 years of selling the original land.
- Exemption Revoked: If the new land is sold within 3 years, the exemption is reversed.
- Partial Exemption: If the cost of new land is less than the capital gain, the remaining gain is taxable.
Also Read: What Investments Qualify for Deductions Under Section 80C?
Who Is Eligible to Claim Section 54B Tax Benefits?
To eligible for the Section 54B exemption, taxpayers must fulfill the following criteria:
| Eligibility Criteria | Requirements |
|---|---|
| Who Can Claim | Only individuals and Hindu Undivided Families (HUFs) – Not available for companies, LLPs, or firms |
| Type of Land Sold | Agricultural land, classified as either long-term (held for over 24 months) or short-term (held for 24 months or less) |
| Land Usage | The agricultural land must have been used for farming by the taxpayer, their parents, or HUF for a minimum of two years before the sale |
| Reinvestment Requirement | The proceeds must be reinvested into another agricultural land within two years of the sale |
| Location of New Land | The replacement agricultural land must be located within India |
Note: In the case of compulsory acquisition, the time limit for purchasing new land is calculated from the date of receiving the compensation, not the acquisition date.
Also Read: LTCG Tax on Sale of Property Calculator
What is the Exemption Amount Under Section 54B?
The exemption under Section 54B is the least of the following two amounts:
- The cost of the new agricultural land you buy.
- The capital gains from selling your old agricultural land.
Let’s go through an example to clarify:
Mr. Arjun sold his agricultural land for ₹1 crore, which he originally purchased for ₹50 lakhs. The capital gain from the sale is ₹50 lakhs. He reinvested ₹70 lakhs in new agricultural land. Since the exemption under Section 54B is the lesser of the capital gain or the cost of the new land, he can claim an exemption of ₹50 lakhs. Therefore, his taxable capital gain will be ₹0.
Example Calculation under Section 54B as follows:
| Description | Amount (Rs.) |
|---|---|
| Sale Price of Agricultural Land | 1,00,00,000 |
| Purchase Price of Sold Land (Original Cost) | 50,00,000 |
| Capital Gain (Sale Price – Original Cost) | 50,00,000 |
| New Agricultural Land Purchase Cost | 70,00,000 |
| Exemption Under Section 54B (Lower of Capital Gain or New Land Cost) | 50,00,000 |
| Taxable Capital Gain (Capital Gain – Exemption) | 0 |
Also Read: Capital Gain Tax on Sale of Property in India
What Happens to Tax Exemptions After Selling Agricultural Land?
A 3-year lock-in period applies when claiming an exemption under Section 54B of the Income Tax Act. Here are the possible scenarios and their outcomes:
Scenario 1:
- Condition: If the new agricultural land is sold within 3 years, and its cost is less than the capital gains from the sale of the old land.
- Outcome: The exemption is canceled, and the full capital gain becomes taxable, with no cost of acquisition to offset it.
Scenario 2:
- Condition: If the new agricultural land is sold within 3 years, but its cost exceeds the capital gains.
- Outcome: The exemption is canceled, but the taxpayer can adjust the cost of the new land by deducting the exemption already claimed while calculating the capital gains.
Scenario 3:
- Condition: If the new agricultural land is sold after 3 years.
- Outcome: The exemption is still valid, and the taxpayer can use the indexed cost of acquisition to calculate the long-term capital gains from the sale of the new property.
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What Happens to Exemptions When Agricultural Land is Sold?
When agricultural land is sold, any exemptions claimed under Section 54B are revoked if the new land is sold within 3 years or if the reinvested amount is less than the capital gains.
- When agricultural land is sold, capital gains are taxable under the Income Tax Act.
- Capital gains are calculated as the sale price minus the cost of acquisition, adjusted for sale-related expenses.
- Section 54B allows individuals and HUFs to defer capital gains tax by reinvesting the proceeds into another agricultural land.
- To claim the exemption, the new land must be purchased within 2 years from the sale of the old land.
- Both the sold land and the purchased land must be classified as agricultural land as per the Income Tax Act.
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Understanding the Capital Gains Account Scheme (CGAS)
The Capital Gains Account Scheme (CGAS) is a provision under Section 54B that allows taxpayers to deposit their capital gains if they are unable to use the entire amount to purchase new agricultural land before the due date for filing the Income Tax Return (ITR).
The CGAS ensures that the taxpayer can still claim an exemption on the capital gains even if the entire amount isn’t reinvested in the new land immediately.
Key Points about CGAS:
- Purpose: To help taxpayers who cannot reinvest their capital gains in the new agricultural land within the allowed period.
- Time Frame: The taxpayer must deposit the capital gains in the CGAS before filing the ITR.
- Exemption Claim: The deposited amount remains exempt from tax as long as it is used to purchase new agricultural land within three years.
- Taxation: If the deposited money is not used to buy new land within three years, it is added to taxable income and taxed according to applicable income tax slabs.
The CGAS helps ensure that taxpayers comply with the requirements of Section 54B and benefit from the exemption without losing out due to time constraints.
Also Read: Maximizing Income Tax Benefits for Home Buyers
How to Declare Agricultural Land Sale in Income Tax Return
When selling agricultural land and claiming exemption under Section 54B, taxpayers need to report the sale in their Income Tax Return (ITR). Proper declaration is essential to ensure tax exemptions are granted.
| Type of Agricultural Land | Taxability | ITR Disclosure | Exemptions Available |
|---|---|---|---|
| Rural Agricultural Land | Not considered a capital asset, no tax on sale profit | Report in Schedule EI under Section 10(1) | Not applicable (Fully Exempt) |
| Urban Agricultural Land | Considered a capital asset, taxable as per capital gains rules | Report in Schedule CG of ITR | Exemptions under Section 54B, 54EC, and 54F may apply |
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Is TDS Applicable on Agricultural Land Sale?
A 1% TDS is charged on property transactions over Rs. 50 lakhs, but this rule doesn’t apply to the sale or purchase of agricultural land, regardless of the transaction amount.
To claim an exemption under Section 54B, taxpayers must reinvest the proceeds from selling agricultural land into buying another agricultural land. If they can’t invest immediately, they can deposit the funds into a Capital Gains Account Scheme (CGAS) and still claim the exemption.
Case Study: Exemption Under Section 54B
This case study explains how Mr. Khushal can claim an exemption under Section 54B for the sale of agricultural land, including the conditions for deposit in the Capital Gains Account Scheme (CGAS) and its subsequent tax implications.
Scenario:
- Taxpayer: Mr. Khushal
- Purchase Date of Old Land: April 2017
- Sale Date of Agricultural Land: 25th August 2022
- Sale Proceeds: Rs. 25,20,000
- Capital Gain on Sale: Rs. 5,00,000
Investment in New Agricultural Land:
- Deposit in CGAS (Capital Gains Account Scheme): Rs. 5,00,000 (July 2023)
- Purchase of Agricultural Land in January 2024 for Rs. 4,00,000
- No purchase made until 24th August 2024 for the remaining amount
Exemption Calculation Under Section 54B:
| Particulars | Amount (Rs.) |
|---|---|
| Sale Proceeds from Old Agricultural Land | 25,20,000 |
| Capital Gain Arising from Sale | 5,00,000 |
| Investment in New Agricultural Land | 5,00,000 |
| Amount Deposited in Capital Gains Account Scheme (CGAS) | 5,00,000 |
| Exemption under Section 54B for FY 2022-23 | 5,00,000 |
| Purchase of Agricultural Land in January 2024 | 4,00,000 |
| Unutilized Amount (Rs. 5,00,000 – Rs. 4,00,000) | 1,00,000 |
| Taxable Capital Gain in FY 2024-25 | 1,00,000 |
- Exemption Claimed: Mr. Khushal can claim an exemption of Rs. 5,00,000 for FY 2022-23 under Section 54B by depositing the full amount in the Capital Gains Account Scheme (CGAS).
- Revocation of Exemption: However, since he did not fully utilize the deposited amount to purchase agricultural land by 24th August 2024 (i.e., he only purchased land for Rs. 4,00,000), the unutilized Rs. 1,00,000 will be taxable as capital gain in FY 2024-25.
Conclusion
Section 54B provides tax relief on capital gains from the sale of agricultural land, allowing individuals and HUFs to claim an exemption by reinvesting in new agricultural land within two years.
While beneficial, it comes with conditions like the reinvestment period and a cap on the exemption amount. Proper understanding can help taxpayers minimize tax liabilities effectively.
Frequently Asked Questions
Section 54B of the Income Tax Act provides tax exemption on capital gains from the sale of agricultural land if the proceeds are reinvested in another agricultural land within two years.
To claim LTCG exemption in ITR, report the capital gain and exemption details in the relevant ITR schedule and ensure compliance with reinvestment conditions under applicable section.
The exemption under Section 54B is the lower of the capital gain from the sale of agricultural land or the amount reinvested in new agricultural land within two years.
The sale of rural agricultural land is not taxable, but the sale of urban agricultural land is subject to capital gains tax.
The 54B exemption allows individuals and HUFs to avoid capital gains tax by reinvesting the sale proceeds of agricultural land into new agricultural land within two years.
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