Owing to better long-term returns and financial security, a significant number of urban investors are investing in agricultural land in India.
As per the income tax act, agricultural land from the urban areas would be considered a capital asset and so tax is attracted on the sale of such land as capital gains. However, an exemption can be claimed from such capital gains under section 54B, if specified conditions are fulfilled.
What is section 54B?
Section 54B gives relief to a taxpayer who sells their agricultural land and from its sale proceeds, purchases another agricultural land. Essentially the objective of the seller was not to earn income by the sale of old land but to shift to another land.
The new agricultural land purchased must be in India, and may either be rural land or urban land.
Conditions to be satisfied to claim an exemption under section 54B:
- The taxpayer must be an Individual or HUF.
- The asset transferred should be agricultural land. The land may be a long-term capital asset or a short-term capital asset.
- The land must have been used for agricultural purposes by the individual or his parents for at least two years prior to the date of transfer. In the case of HUF, the land must be used by any HUF member.
- The taxpayer must purchase new agricultural land within 2 years from the sale of the old agricultural land.
The maximum amount of exemption eligible under section 54B will be the least of the cost of new agricultural land or the capital gains on the sale of agricultural land.
Let’s understand with an example,
Mr. Anuj purchased agricultural land in April 2018 for ₹9,00,000. Since the date of purchase, the land was being used for agricultural purposes. The land was sold in July 2022 for ₹12,40,000. And he purchased a new agricultural land worth ₹6,00,000 in 2022. How Anuj will be able to claim a deduction under section 54B?
The calculation of the exemption is as follows:
Taking inflation into consideration, the cost price will be adjusted, and the indexed cost of acquisition will also be taken into account.
Index Cost of Acquisition = Cost Price* Cost of Inflation (FY 2022-23) / Cost of Inflation (2018-19).
What if the new agricultural land is not purchased before the due date for filing ITR?
In such a case, the capital gains amount should be deposited in the capital gains account scheme (CGAS) and withdrawn when the agricultural land is purchased.
What if the new agricultural land is transferred within a period of 3 years?
If the new agricultural land is transferred within a period of 3 years from the date of purchase, then the tax exemption allowed earlier would be withdrawn and taxable as capital gains.
What happens if the entire amount of capital gain is not invested in the purchase/construction of new agricultural land?
The amount of capital gain not invested in new agricultural land is liable to be taxable as capital gains.
Is the exemption under section 54B available for the transfer/sale of rural agricultural land?
No, rural agricultural land has been specifically excluded from the definition of a capital asset, therefore taxes would not be levied on the sale of rural agricultural land. The exemption is only available to land sold in urban areas.
Here’s a detailed article on Section 54B of Income Tax Act on Sale of Agri Land- Learn by Quicko.
If any questions, ask them out!