Section 54B-Capital Gain Exemption on Sale of Agricultural Land

Section 54B-Capital Gain Exemption on Sale of Agricultural Land-

• Agricultural land in a rural area in India, is not considered as capital assets as defined under section 2(14), therefore any gains arises from the sale of agricultural land in rural areas are exempt from tax.
• Capital gains on compensation received for compulsory acquisition of urban agricultural land are exempt from tax, under Section 10(37) of the Income Tax Act.
• Agricultural land in urban areas in India, is considered as capital assets as defined under section 2(14), therefore any capital gain arises from the sale of agricultural land in urban areas are subject of tax.

Capital gain tax on agricultural land in urban areas are as calculated, as capital gain calculated on sale of other property. Exemptions u/s 54B, 54F or 54EC can be availed up to the amount of capital gain invested. Therefore w.e.f. 2017-18-

• Short-Term Capital Gain arises when a land is sold within 24 months of its purchase. How to calculate Income Tax on Capital Gain

  Sale Consideration - Cost of Acquisition – Cost of Improvement

  
  
• Long-term capital gain arises when a land is sold after 24 months of its purchase. How to calculate Income tax on Capital Gain

  Sale Consideration - Indexed Cost of Acquisition – Indexed cost of Improvement

Example, 1 (Long term capital gain)-

Cost of Inflation Index is as under-

2013-14         220

2017-18         272

Answer-

Mr. X sold an agricultural land on 15.07.2017 or purchase on 25.03.2013 i.e. after 2 years of purchase comes under Long term capital gain, so cost will be Indexed as under-

(A) Cost of Acquisition-    Cost Price / Index for the year of purchase X Index for the year of sale

Rs. 26,50,000 / 220 x 272 = 32,76,364

(B) Cost of Improvement-    Cost of Improvement / Index for the year of improvement X Index for the year of sale

Rs. 3,00,000 / 220 x 272 = 3,70,909

Total Cost (C) {A+B}   Rs. 32,76,364 + 3,70,909 = 36,47,273

Sale Consideration (D)    Rs. 50,00,000

Long term Capital Gain (D-C)-   Rs. 50,00,000 – Rs. 32,76,364 – Rs. 3,70,909 = Rs. 13,52,727

Example-2, (Short term capital gain)-

Answer-

Mr. X sold the above land before 2 years from the date of purchase, short term capital gain arises as under-

Short term capital gain = Rs. 42,00,000 – 30,00,000 = Rs. 12,00,000

• This exemption is available to an Individual or a HUF.
• The land which is being sold must have been used for agricultural purposes for a period of 2 years, immediately before the date of transfer.
• Another land for the agricultural purpose should be purchased within a period of 2 years from the date of transfer of this land.
• The new agricultural land which is purchased to claim capital gains exemption should not be sold within a period of 3 years from the date of its purchase.
• In case you are not able to purchase agricultural land before the date of furnishing of your Income Tax Return, the amount of capital gain must be deposited in Capital Gains Account Scheme. The exemption can be claimed to the extent of the amount deposited.
• The amount which have deposited in Capital Gains Account Scheme was not used for the purchase of agricultural land, it shall be treated as the capital gain of the year in which the period of 2 years from the date of sale of land expires

1. Under section 54B -
   

   The exemption under section 54B, can be claimed up to the amount of capital gain, invested in another agricultural land-

   • If the entire amount of capital gain is invested in another agricultural land, the exemption can be claimed the entire amount of capital gain; or
   • If the entire amount of capital gain is not invested in another agricultural land, the exemption can be claimed proportionately to the extent of amount of capital gain invested.
2. Under section 54F-

   The exemption under section 54F, can also be claimed up to the amount of capital gain, invested in Residential House property. The assessee should not have more than one residential house (Including new house).

   Note: The exemption under section 54B & 54F will be reversed-

   If the new agricultural land or residential house property (against which the exemption has taken) is sold/transfer within 3 years from the date of purchase, the tax exemption will be taxable in the year, in which such agricultural land or house property is sold out.

3. Under section 54EC-

   The exemption under section 54EC, can also be claimed up to the amount of capital gain, in specified capital bonds within 6 months from the date of transfer. The amount up to Rs. 50,00,000 can be invested in specified bonds, which have a lock in period of 5 years.

Example, 3-

Answer-

Long term capital gain as above-   Rs. 13,52,727

Less: Exemption u/s 54B   Rs. 13,52,727

Taxable long-term capital gain   Nil

(Amount Invested Rs. 15,00,000 which is greater than the amount of long-term capital gain, so the taxable amount is Nil, the said agricultural land should not be sold before the 3 years from the date of purchase otherwise exemption under section 54B will be reversed and it is taxable as long-term capital gain.

Example, 4-

Answer-

Long term capital gain as above-   Rs. 13,52,727

Less: Exemption u/s 54B   Rs. 10,00,000

Taxable long-term capital gain   Rs. 3,52,727

(Amount Invested Rs. 10,00,000 which is below the amount of long-term capital gain, so the taxable amount is Rs. 3,52,727/-)

Example, 5-

Answer-

Long term capital gain as above-   Rs. 13,52,727

Less: Exemption u/s 54B/54F/54EC   Rs. 0

Taxable long-term capital gain   Rs. 13,52,727

(Mr. X has not Invested any amount under the schemes specified under section 54B, 54F, 54EC within the specified time period. So, the entire amount of capital gain is taxable in the financial year 2020-21.

Example, 6-

Answer-

Earlier availed Long-term capital gain:     Rs. 13,52,727

Sale Consideration (A)    Rs. 18,00,000

Less: Cost of acquisition* (B)    Rs. 1,47,273

*(Purchase price Rs. 15,00,000 - Exemption u/s 54B availed Rs. 13,52,727 = 1,47,273)

Short term capital gain   ; (A-B)    Rs. 16,52,727

(Mr. X has sold the property within 3 years from the date of purchase. So the short term capital gain arises of Rs. 16,52,727, due to reversal of capital gain earlier availed under section 54B in the financial year 2019-20.)

Note-

• The Assessee can also avail exemption under section 54F, 54EC.
• TDS u/s 194IA is not applicable on sale of agricultural land, however, TCS (tax collection at source) may get attracted if the sale proceeds in cash exceed Rs.2 lakhs under section 206C(ID).

• If the asset is sold in the Previous Year, and the seller intends to, but is yet to purchase the new agricultural land or house property as the time limit of 2 years or 3 years or capital bonds with in h months from the date of transfer/sale, as not yet expired, then the assessee is required to deposit the amount of gains in the Capital gains account scheme (in any branch of public sector, bank) before the due date for filing income tax returns.
• However, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the previous year in which time period expire (from the date of transfer of the original asset).