EXEMPTION U/S 54B OF INCOME TAX
Under Section 54B of the Income Tax Act, an Individual or HUF selling an Urban Agricultural land can avail tax exemptions from Capital Gains if the capital gains are invested in purchase of Rural or Urban Agricultural Land.
Taxpayers such as partnership firms, LLP’s, companies or any other association or body cannot claim tax exemption under Section 54B.
Conditions for claiming exemption under Section 54B.
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A. |
Assessee |
Only Individual or HUF can claim exemption under this section. |
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B. |
Transferred Asset |
Asset sold/ transferred during the previous year must be a Urban Agricultural Land used by Individual or his Parents for agricultural purposes during the 2 years before transfer of such Agricultural Land. |
|
C. |
Capital Gain on Transferred Asset |
Asset can be both short term as well as long term i.e Assessee can claim exemption against both short term as well as long term capital gain. |
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D. |
Asset to be Acquired |
New asset acquired must be Rural Agricultural land or Urban Agricultural land. |
|
E. |
Time limit for Purchase or reconstruction |
Purchase: The Rural Agricultural land or Urban Agricultural land should be purchase within 2 years from the date of such transfers. |
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F. |
Deposit Scheme |
Capital Gain Account Scheme (Note 1). |
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G. |
Amount of exemption |
i.Capital Gain
ii.Cost of New Asset/ Deposit Amount
(whichever is lower)
Note: If cost of new asset exceeds Rs. 10 crores, then the amount exceeding Rs. 10 crores shall not be taken into account for the purpose of exemption (w.e.f. A.Y 24-25). |
|
H. |
Locking Period on Transfer of New Asset |
If New Asset is transferred within 3 years from date of purchase or construction the exemption claimed earlier shall be withdrawn & Cost of Acquisition of new asset reduced by exempted capital gain while calculating capital gain on new asset. |
|
I. |
Case Laws Gurnam Singh 2010 |
Exemption u/s 54B cannot be denied solely on the ground that new agricultural land purchased is not wholly owned by the assessee, as the assessee’s son is a co-owner as per the sale deed. |
|
J. |
Notes |
1.If assessee acquired new asset as per Rural Agriculture land & if he transfers that land within 3 Years period, then exemption claimed earlier shall not be withdrawn as Rural Agriculture land is not a Capital Asset.
2.Deduction u/s 54B can be for Short Term Capital Gain also. The condition is that land should be used by assessee or his parents for 2 years prior to the date of transfer.
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NOTE 1: CAPITAL GAIN ACCOUNT SCHEME
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1.
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Amount: If investment u/s 54B is not made before the date of filing of return, then the amount of capital gain has to be deposited under Capital Gain Account Scheme. The amount so deposited shall be deemed to cost of new asset. |
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2.
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Time Limit: Such deposit in Capital Gain Account Scheme should be made before due date or actual date of filing the return, whichever is earlier. |
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3.
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Unutilized Amount: If the amount deposited is not utilized for the specified purpose within the stipulated period, then the unutilized amount shall be charged as Capital Gain of the P.Y in which the specified period expires. |
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NOTE: CBDT clarifies that in the event of death of an individual before the stipulated period, the unutilized amount is not chargeable to tax in the hands of legal heir of deceased individual. |
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Example: Mr. Rajat Sold his Agriculture Land in April 2025 for Rs. 25,20,000. Since past 10 years the land was used for agriculture purpose. Long term Capital Gain arising on transfer of such land amounted to Rs. 8,40,000. In December 2025 he purchased another agriculture land worth Rs. 10,00,000. The new land was, however sold in April 2026 for Rs. 12,00,000. What will be the amount of taxable Capital Gains in the hands of Mr. Rajat for the Financial Year 2025-26 & 2026-27?
PART 1
Computation of Capital Gains for the Financial Year 2025-26
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Particulars |
Amount (in Rs.) |
|
Long term capital gain arising on transfer of old land |
8,40,000 |
|
Less: Exemptions u/s 54B (Note 2) |
8,40,000 |
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Taxable long term Capital Gain |
Nil |
NOTE 2:
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EXEMTION U/S 54 B WILL BE LOWER OF FOLLOWING |
|
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Amount of Capital Gain arising on transfer of agricultural land |
8,40,000 |
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Amount Invested in New Agricultural Land |
10,00,000 |
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Exemption u/s 54B (lower of above) |
8,40,000 |
PART 2:
Computation of Capital Gains for the Financial Year 2025-26
If a taxpayer purchases another agricultural land and claims exemption under Section 54B and subsequently he transfers the new agricultural land within a period of 3 years from the date of its acquisition, then the benefit granted earlier under Section 54B will be withdrawn. The computation will be as follows:
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Particulars |
Amount (in Rs.) |
|
Full value of consideration (i.e. sales consideration of new agricultural land) |
12,00,000 |
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Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset |
Nil |
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Net Consideration Received |
12,00,000 |
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Less: Cost of Acquisition (Note 3) |
1,60,000 |
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Short-term Capital Gains on sale of new agricultural land |
10,40,000 |
NOTE 3: If the agricultural land is sold before a period of 3 Years from the date of its purchase, then at the time of computation of Capital Gain arising on transfer of the new agricultural land, the amount of Capital Gain claimed as exempt under Section 54B will be deducted from the cost of acquisition of new agricultural land. Applying these provisions, the cost of acquisition of new agriculture land will be computed as follows:
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Particulars |
Amount (in Rs.) |
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Cost of Acquisition of new land |
10,00,000 |
|
Less: Exemption claimed earlier under Section 54B |
8,40,000 |
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Cost of new land to be use while computing Capital Gain |
1,60,000 |
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