• Shruti Sharma

Section 54B of Income Tax Act

Updated: Oct 14

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There are various sections in the Income Tax Act that permit taxpayers to avoid making tax payments. One such example is Section 54B of the Income Tax Act. According to this Section, certain conditions must be met in order for capital gains from the sale of agricultural land to qualify for tax exemption. Rural agricultural land does not qualify as a capital asset and is therefore exempt from capital gains taxes. Urban agricultural land is only excluded from capital gains tax when the sale earnings are used to purchase further agricultural land.


If capital gains exceed the price of a new asset

The difference between the amount of the capital gain and the cost of the new asset will be charged as income for the fiscal year if the capital gain is more than the cost of the land as purchased. Any capital gain from the sale of agricultural land within three years of its purchase is treated as zero for the purposes of determining the exemption that corresponds to the purchase of a new asset.


If capital gains are lower than the price of a new asset

The capital gain will not be considered income if the amount is equal to or less than the cost of the new asset. The taxable capital gain is stated using the following formula when the cost of the newly purchased agricultural land is less than the amount of capital gains: capital gains chargeable to tax are computed as the excess of capital gains over the cost of the newly purchased agricultural land (capital gains less cost of the new agricultural land).


Fundamental Conditions to Claim Exemption Under Section 54B of the Income Tax Act

1. Taxpayers must fall within the person or HUF classification. Companies, LLPs, and trusts are not covered by this exception.

2. The agricultural land in question must have been used for farming by the assesses, their parents, or a HUF for two years prior to the transfer.

3. A taxpayer may only request an exemption if they purchase additional agricultural land within two years of the transfer in question.

4. The newly acquired land needs to be in India.


Exemption Amount Per Section 54B of the Income Tax Act


whichever of the following is lower will be exempt under clause 54B:


  • Amount of capital gains attributable to the sale of agricultural property; or Investment in new agricultural property


Consequences to Exemptions in Case of Sale of Agricultural Land


If the agricultural land under consideration is located in a non-rural location and the entity has reinvested in purchasing another agricultural land, Section 54B of the Income Tax Act permits exemption from capital gains tax. However, in order to avoid the following scenarios, a person must occupy the new land for at least three years:-


  1. The Income Tax Department will cancel the exemption granted under Section 54B and subject the entire sale value of agricultural property to capital gains taxation if the individual sold the land within the lock-in period and the cost of the new asset is less than capital gains.

  2. Exemptions are eliminated if a person sells new land within three years and the cost of the new asset exceeds capital profits. However, while calculating capital gains, the taxpayer may deduct the cost of acquisition.