Exemption from capital gain on transfer of agricultural land – Section 54B

Section 54B of the Income Tax Act provides an exemption from the capital gain arisen on the transfer of agricultural land by acquiring another agricultural land. The present article explains the provisions attached with the exemption available under section 54B of the Income Tax Act.

However, before understanding the exemption available under section 54B, it is essential to understand the following points attached to the agricultural land –

1. Any rural agricultural land is excluded from the definition of ‘Capital Assets’. Like-wise any gain on transfer of the same will not be taxable under the head ‘Capital Gain’.

2. Any capital gain arisen on compensation received on compulsory acquisition of urban agricultural land is exempt from tax under section 10 (37).

Mandatory conditions to avail exemption under section 54B

The assessee is required to fulfil following listed conditions in order to avail the exemption under section 54B –

1. The exemption benefit under section 54B is available only to the Individual or a Hindu Undivided Family (HUF).

2. The asset transferred should be agricultural land. Here, it is important to note that the agricultural land transferred can be any ‘Long term capital asset’ or ‘Short term capital asset’.

3. The agricultural land transferred should have been used in the following manner –

4. The assessee is required to acquire another agricultural land within a period of two years from the date of transfer of the old agricultural land.

Please note, in case of compulsor   y acquisition, the assessee is required to acquire new agricultural land within a period of two years from the date of receipt of the compensation.

Amount of exemption available under section 54B of the Income Tax Act

In case the assessee fulfils all the above conditions and qualifies for the exemption under section 54B, then, the exemption available would be lower of the following –

• An amount of capital gain arising on sale of agricultural land; or
• Investment in new agricultural land (which also includes an amount deposited in Capital Gain Deposit Scheme).

Withdrawal of Section 54B exemption

As seen above, section 54B provides an exemption, towards the capital gain arisen on the transfer of agricultural land, by acquiring another agricultural land. However, it is mandatory that the new agricultural land so acquired shouldn’t be transferred for a period of three years from the date of acquisition.

In case the assessee transfers the new agricultural land before the expiry of a period of three years, then, the amount of capital gain which is claimed as an exemption under section 54B will be deducted from the cost of acquisition of the new agricultural land.

Let us understand the above situation with an example –

Suppose In 2017, Mr. X sold his agricultural land with a capital gain of say INR 5 Lakhs. By investing the capital gain amount, Mr. X acquired new agricultural land in 2018 for INR 8 Lakhs and claimed exemption of INR 5 Lakhs under section 54B. The new agricultural land purchased by Mr. X was transferred by him in 2020 for INR 15 Lakhs. In this case, the calculation would be as under –

Capital Gain Deposit Account Scheme

The assessee can claim the exemption under section 54B by acquiring a new agricultural land within a period of two years. However, when the capital gain arising on transfer of old agricultural land is not utilized for acquiring new agricultural land till the date of return filing, then, in order to claim the exemption, the unutilized amount is required to be transferred to ‘Capital Gains Deposit Account Scheme’.

The assessee can acquire the new agricultural land by utilizing the amount deposited in the ‘Capital Gain Deposit Account Scheme’ within the prescribed time. However, in case the amount deposited is not utilized within the prescribed time, then, the unutilized amount will be treated as income of the previous year in which the specified period of 2 year expires.

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