Section 54B: Capital Gain on Sale of Agricultural Land

What is Section 54B of the Income Tax Act?

Section 54B of the Income Tax Act provides for exemption from capital gains if the sale proceeds of agricultural land are used to purchase another agricultural land.

• This exemption can be claimed by individuals and HUFs.
• The asset being transferred should be an agricultural land. The land must have been used for agricultural purposes by individuals, his parents, or HUF within 2 years immediately before the date of transfer.
• The new agricultural land should have been purchased within a period of two years after the date of sale.
• If the new land purchased is sold within three years from the date of its purchase, the capital gain exemption claimed earlier will be revoked.
• If the cost of the new land purchased is less than the profit from the sale of land, then the capital gain is taxable.

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Who Can Claim Section 54B Deduction?

To claim an exemption under Section 54B, taxpayers must meet the following conditions:

1. The taxpayer must be an individual or HUF. Companies, LLPs, and firms cannot avail of this exemption.
2. The taxpayer must sell agricultural land classified as either:
   1. A Long-Term Capital Asset (land held for more than 24 months), or
   2. A Short-Term Capital Asset (land held for 24 months or less).
3. The agricultural land sold must have been used for agricultural purposes for at least two years prior to the transfer by the individual, their parent, or the HUF, as applicable.
4. The taxpayer must purchase new agricultural land within two years of selling the old land.
5. The new agricultural land must be located in India.

Note: In the case of compulsory acquisition, the period of acquisition of new agricultural land will be determined from the date of receiving the compensation and not from the date of compulsory acquisition.

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

The amount of exemption under section 54B is the least of the following -

• The cost of a new agricultural land
• The capital gains on the sale of agricultural land

Here’s an example to help you understand better -

Mr. Sunil sold agricultural land during September 2024, for Rs.60 lakhs. This land was acquired by him in FY 2016-17 for Rs.30 lakhs. After this, he acquired a new agricultural land for Rs.45 lakhs.

1. Capital Gain Calculation

• Sale price: ₹60,00,000
• Cost of acquisition: ₹30,00,000
  (Since the sale is after 23 July 2024, indexation benefit is not applied by default. However, if Mr. Sunil chooses to use indexation he must pay tax at higher rates instead of the special 12.5% rate. For simplicity, we calculate without indexation here.)

Capital gain = ₹60,00,000 − ₹30,00,000 = ₹30,00,000

2. Exemption Under Section 54B

Exemption = Lower of:

• Capital gains: ₹30,00,000
• Cost of new agricultural land: ₹45,00,000

So, exemption = ₹30,00,000

Net taxable capital gain after exemption = ₹30,00,000 − ₹30,00,000 = ₹0

Option 2: Capital Gains Calculation With Indexation

(Allowed only if the taxpayer opts for it)

* Indexed cost calculated using Cost Inflation Index (CII):
30,00,000 × 348 / 264

Then, Sunil can claim a deduction under section 54B in the following manner -

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How is Exemption Calculated in Case of Sale of 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:

Situation 1

Selling the new agricultural land within 3 years, and the cost of the new asset is less than the Capital Gains.

• Consequence: The exemption under Section 54B is revoked. The entire sale value of the agricultural land becomes taxable as capital gains, with the cost of acquisition considered NIL.

Situation 2

Selling the new agricultural land within 3 years, and the cost of the new asset is more than the Capital Gains.

• Consequence: The exemption under Section 54B is revoked. However, the taxpayer can deduct the cost of acquisition (Total Purchase Price – Exemption claimed under Section 54B) when calculating capital gains.

Situation 3

Selling the new agricultural land after 3 years from the date of purchase.

• Consequence: The exemption under Section 54B remains intact. The taxpayer can claim the indexed cost of acquisition when calculating Long-Term Capital Gains on the sale.

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What Happens to Exemptions When Agricultural Land is Sold?

When agricultural land is sold, the capital gains from the sale become taxable under the Income Tax Act. The capital gains are calculated as the difference between sale proceeds and the cost of acquisition of the agricultural land, adjusted for the expenses during the sale process.

Taxpayers can avail of the exemptions from capital gain tax under section 54B. Individuals and HUFs who have earned capital gains from the sale of agricultural land can defer their tax liability by reinvesting the proceeds in another agricultural land.

To avail of the exemption, the proceeds must be reinvested within two years of the date of sale of the old land. Also, the land sold and the land purchased must be classified as agricultural land as per the definition of the Income Tax Act.

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What is the Capital Gains Account Scheme (CGAS)?

If taxpayers cannot use the entire sales consideration to purchase new agricultural property before the ITR submission due date, they can deposit the capital gains amount in the Capital Gains Deposit Account Scheme (CGAS). This account allows them to claim an exemption for the unused amount that is deposited in the CGAS.

However, if the deposited amount is not invested within three years, it will be added to the taxable income and taxed at applicable slab rates.

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How to Disclose Agricultural Land Sale in ITR?

Sale of Rural Agricultural Land

Rural agricultural land is not considered a capital asset under the Income-tax Act. Therefore, any gains from its sale are not taxable. Income from rural agricultural land is exempt under Section 10(1) and should be reported in Schedule EI of the ITR.

Sale of Urban Agricultural Land

Urban agricultural land is classified as a capital asset. The sale must be reported in Schedule CG of the ITR. The indexed cost of acquisition and improvement can be deducted from the sale value to calculate taxable gains. Additionally, exemptions under Sections 54B, 54EC, and 54F may be claimed on the sale of urban agricultural land.

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Documents Needed to Claim Section 54B Exemption

To claim exemption under Section 54B, you should keep the following documents ready. These may be asked for while filing your ITR or during scrutiny by the Income Tax Department:

• Sale Deed of the Original Agricultural Land
  This proves the sale of the agricultural land and helps calculate capital gains.
• Proof that the Land Was Used for Agricultural Purposes
  Any document showing that the land was used for agriculture in the last 2 years before sale, such as:
  • Land revenue records (Jamabandi / 7/12 / Patta, etc.)
  • Crop receipts or agricultural income records
  • Certificate from local revenue authority (if available)
• Purchase Deed of the New Agricultural Land (if already purchased)
  Required to show reinvestment of capital gains in new agricultural land.
• Capital Gains Account Scheme (CGAS) Proof (if applicable)
  If the new land is not purchased before the ITR filing due date:
  • CGAS deposit receipt or passbook
  • Deposit date and amount details

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TDS Applicable on the Sale of Agricultural Land

A 1% Tax Deducted at Source (TDS) applies to property transactions exceeding Rs.50 lakhs. However, Section 194IA, which governs TDS on property, does not apply to the sale or purchase of agricultural land, even if the transaction value exceeds Rs.50 lakhs.

Taxpayers must reinvest the sale proceeds from the original agricultural land to purchase another agricultural land if they want to claim an exemption under section 54B. If they are not able to invest the amount immediately, they can deposit the amount into a CGAS account and claim the exemption.

Now that you know about the exemption under Section 54F make sure you don’t miss out on claiming it. If you find taxes complicated, our team of expert Chartered Accountants is here to assist you. Get professional help with your taxes. Hire an Online CA Now!

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