Capital Gain Exemptions a tool for Tax Evasion? Loopholes in Sec. 54B

Monisha Jain


The long term and short term capital gains are taxed under section 50 to 54 in the Income Tax Act, 1961. The amount of such capital gains is generally lump sum and attracts huge tax liability for the assessee and is a important source of revenue for the nation from tax collection. The various assets are taxed at varied rates depending upon the type of the asset and the holding period of such asset in the hands of the assessee and sometimes also includes the holding period of the previous owners in case of a gift or other transfers mentioned in the act.

The assessee is generally over burdened with the heavy tax liability arising on the sale of any asset and tends to adopt malpractices to evade his tax liability. In order to prevent such practice to become a regular trend among the citizens and to divert the flow of such capital gains into nation building and economic development the tax authorities have provided legal means to avoid the heavy tax liability in such a manner that the amount is till used for economic growth and the assesse also earns certain return on the capital gain. This is done by way of the various exemptions mentioned under section 54 (54A,54B,54F,54EC,54D etc)

One such exemption mentioned under section 54B is that the assessee can invest the long term capital gain earned by him during the previous year can be invested in a agricultural rural land i.e. the assessee can purchase an agricultural rural land from the amount of capital gain earned by him within a period of 2 years or if he is unable to do so he can also deposit the amount in Capital Gains Account Scheme (CGAS) within six months of the end of the previous year. The amount so deposited has to be used for the aforesaid purpose within the stipulated time period otherwise it would be treated as long term capital gain and will be taxed accordingly. The other condition to be satisfied to avail this exemption is that the land so purchased from the capital gains must be retained at least for a period of 3 years and if it is sold by the assessee before that the capital gain arising from the sale of the asset will be calculated by considering the cost of acquisition of such asset as nil or the other treatment is that the new asset is taxed in a normal manner and the previously exempt capital gain is taxed subsequently in the current previous year.

The above provisions are well planned to encourage investment in agricultural land in rural areas so as to enable and smoothen the process of economic growth but the fact that capital gains arising from the sale of agricultural land is exempt if the new land so purchased is situated in the areas specified in the section 2(14)(iii). This gives the assessee the leverage to purchase agricultural land from the taxable capital gains but not hold it for the intended period of time. Rather, the assessee can very well sell the property in a few days without bothering about the tax liability as the new capital gain is exempt under the act.

Thus, it is necessary for the Indian Revenue Services officers to look at such minor loopholes in the law and provisions which though they may be aware of but haven’t yet been worked upon or rectified by any amendment for the same.

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  1. One need to pay attention and on section 54B(1)(i) and (ii). The tail part of the same states “and for the purpose of computing in respect of the new asset any CAPITAL GAIN arising from its transfer within a period of three years…” so, the condition is that the NEW ASSET should be capable to generate Capital Gain and to be able to generate Capital Gain it has to be capital asset. So, if the new asset is a rural land then basic exemption may be denied, since it is not a capital asset.

  2. Can this question be answered.
    I purchased agriculture land in 2006,got the land converted to residential purpose during 2009 but been doing agriculture ever since 2006 till date & filling my IT returns declaring my agricultural income of 10-12 lakhs every year.Although the residential conversion of my land took place on records,no buildings were raised, instead agricultural activity had been continuing.Now if I sell this property & buy another agricultural land for the same amount as the sale consideration,will I be liable to pay the so called CAPITAL GAIN TAX

  3. Even if the sale of new agricultural land within the lock in period is exempted but the sale will invoke the capital gain arised on original sale to be taxed as soon as the agrcultural land is sold before stipulated period.

    Revert if i am correct

  4. Madam

    Your article is correct in all aspects. Was really a eyeopener dear.

  5. Exemtion u/s.54B is available only when there is a transfer of an agricultural land used for agriculture during the previous 2 yrs and within 2 yrs another agricultural land is purchased for being used for agricultural purposes. Sec.2(14) exempts agricultural land as specified u/s.2(1A). Hence, your logic works in a very limited way. Only when an agricultural land in urban area is sold and then an agricultural land is purchased in a rural area as specified u/s.2(1A) then the assessee will be benefited.

  6. The capital gain invested in the agricultural land would be exempt under section 54B and if the new land so purchased is situated in the areas specified in the section 2(14)(iii), the onward sale of such new land would also be exempt from capital gain tax. Hence a loophole.

  7. Capital gain if invested in the agricutural land will be exempt under section 54B, moreover if the new land so acquired is situated in the areas specified in the section 2(14)(iii), the onward sale of such new would also be exempt from capital gain tax.

  8. The exemption u/s54B is available only on capital gain (Long term or Short term) arised on the sale of urban agricultural land. And the eligible investment is u/s54B is only agricultural land, it may be urban agricultural or rural agricultural land. Considering the both the point of exemption it seems that there may be very few number of people may be eligible to claim this exemption due to its very nature i.e. sale of urban agricultural land and purchase of any agricultural land. The purpose of law makers behind this provision is to maintain the level of investment in agricultural land and to give relief to farmers who is forces to sale the agricultural land located in urban area. Considering the involvement of agricultural operation this exemption should not be considered as Tax Evasive instead is all about to promote investment in agriculture..

  9. I am not agree with the points raised by the Author in this Article.
    Because section 2(1A)doesn’t covers the revenue received by selling agricultural land. So, by any mean a person can only claim exemption under section 50 B.

    Facts, shall be checked by editor before publishing such articles on this site.


  10. Hi,

    As per my understanding, explanation 1 to section 2(1A) excludes any income arising from the transfer of any agricultural land mentioned in Section 2(14)(iii)(a) or (b) i.e. it is taxable. So, the loophole mentioned would be only when investment is made in agricultural lands which are not covered in section 2(14)(iii)(a) or (b).

  11. Nice On e Dear,its is a Better Tax Planning for any of the Assesses….

  12. It is wrong inference that Long Term Capital Gain tax exemption is source of tax evasion. Because tax evasion is crime attracting penalty and tax exemption permitted by the Parliament is enbling law. Reinvestment helps grow economy, tax evasion attracts penalty equal to 3 times amount purported to be evaded thus there is no incentive to evade tax. Most of the officers are corrupt and their mind is corrupted to the extent that they see everything wrong in the process of finding opportunity to earn illegal money so they try to find fault with law enacted by the Parliament and try to enact themselve law thus trying to perform role as law maker instead of helping tax payers and nation for compliance of the law enacted by the Parliament.

  13. But I thought that if someone was to sell their agriculture land acquired for exempting from the above Section before the stipulated period of 3 years, the capital gains exempt would be taxed in the year in which sale is done. Is that not true?