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This Article discusses about Basic conditions for availing exemption of Section 54B of Income Tax Act,1961.

Section 54B of the Income Tax Act provides relief to individuals or HUF who have transferred their agricultural land and wants to invest the capital gains in Purchasing another Agricultural land.

Eligible Assesses – Only Individual & HUF are eligible for exemption under this section.

Conditions to be Fulfilled :

  • There must be a transfer of urban agricultural land – The classification of urban agricultural land as per Income tax depends upon on the population of the area and its proximity to specific limits; such as –
  • if population is upto 10000,agricultural land within jurisdiction of municipality or cantonment board is urban agricultural land.
  • Such land must have been used for agricultural purpose by the assessee, being an individual or his parents, or a HUF in the 2 years immediately preceding the date of transfer.
  • The Assessee must, within 2 years from the date of transfer purchase another agricultural land (Urban or Rural )
  • The amount of capital gains has to be utilised till the last date of furnishing of return of Income, otherwise the capital gain has to be deposited under the Capital Gain Account Scheme 1988.
  • The land so purchased must not be transferred within a period of 3 year otherwise exemption given shall be withdrawn and for this purpose while computing capital gains on the transfer of new asset, its cost of acquisition shall be reduced by the amount of exemption earlier given.

Quantum of Exemption :

  • If the cost of new agricultural land is more than or equal to the capital gains, entire capital gains is exempted.
  • If the cost of new agricultural land is less  than the capital gains, capital gains to the extent of cost of new agricultural land is exempted.

Illustrations :

1.  if the capital gain is ₹4 lakh and cost of new agricultural land is ₹5 lakh, then, entire capital gain of ₹4 lakh is exempt.

2. if the capital gains is ₹4 lakh and now cost is ₹3 lakh, then, capital gain upto ₹3 lakh is exempt.

Capital Gains in case of Compulsory acquisition of agricultural land – Section 10(37)

  • If any Individual or HUF has agricultural land and this land was being used for agricultural purpose for a period of at least 2 years when
  • it was acquired by the government , in this case capital gains shall be exempt from Income Tax.

Section 54B can be utilised for multiple agricultural lands.

Exemption under both section 54B and 54F may be claimed together if he satisfies condition of both.

If he sells agricultural land and used the proceeds to buy a residential property exemption under both section may be claimed.

Conclusion :

Section 54B of the Income Tax Act, 1961, provides a beneficial provision for individual or HUF engaged in agricultural activities, allowing them to reinvest their capital gains form the transfer of an agricultural land into another agricultural land thereby defer tax liabilities on such gains. It aims to encourage investment in agricultural land and support the agricultural sector in India.


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July 2024