Capital Gains Exemption - Section 54B

A tax exemption is available for taxpayers who make a sale of agricultural land. Normally, under the provisions of Income Tax law, when a taxpayer makes a sale of land, capital gains tax should be paid. However, capital gains exemption is available for sales of land that is used for agricultural purposes. Under the exemption, capital gains, both short-term and long-term, that arise from the transfer of agricultural land is exempt from Income Tax.

Conditions for Exemption

The capital gains exemption for agricultural land is provided only for individual taxpayers and HUFs. To avail of the capital gains exemption, the land that was transferred must have been used by the assessee or a parent of the assessee for agricultural purposes. The utilisation of the land for agricultural purposes must have taken place in the two years immediately preceding the date on which the transfer took place. Further, the assessee should have, within a period of 2 years after the date of sale of the agricultural land, purchased any other land. The land newly purchased should also be used exclusively for agricultural purposes. If the conditions are satisfied, then, instead of the capital gain being charged to income tax as income during the year of transfer, it will be exempt from tax in the following way:

If Capital Gains is more than the Cost of New Asset

If the amount of the capital gain is greater than the cost of the land as purchased, the difference between the amount of the capital gain and the cost of the new asset will be charged as income of the financial year. For the purpose of making the calculation of exemption corresponding to purchase of a new asset, the cost of any capital gain arising from the sale of the agricultural land within a period of 3 years of its purchase is considered as nil.

If Capital Gains is less than the Cost of New Asset

If the amount of the capital gain is equal to or less than the cost of the new asset, then the capital gain will not be charged as income. If the cost of the new agricultural land purchased is less than the quantum of capital gains, the taxable capital gain is expressed through the following formula: capital gains chargeable to tax is calculated as the excess of capital gains over the cost of the new agricultural land (capital gains less cost of the new agricultural land). To know about the concept of Slump Sale in Income Tax, click here.

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Updated on: February 8th, 2020