Section 54B of Income Tax

Section 54B of the Income Tax Act is a section introduced in the legislative framework with the objective of providing relief for farmers who are transferring agricultural land. Prior to the introduction of Section 54B, when a farmer sold agricultural land, the farmer had to pay capital gains tax. The objective of introducing the section is to provide an exemption for the transfer of agricultural land. Once a taxpayer is eligible to claim an exemption under section 54B of Income Tax capital gains tax need not be paid towards the sale of agricultural land. However, the exemption shall be available towards capital gain arising on account of transfer of urban agricultural land exclusively if the sale proceeds are reinvested in acquiring new agricultural land.

Taxpayers should note that rural agricultural land is excluded from the definition of a capital asset as contained in section 2(14) of the Income Tax Act, 1961. Since the rural agricultural land is not covered within the scope of ‘capital asset’ no capital gain is payable at the time of transfer of rural agricultural land. On the other hand, the urban agricultural land being covered within the scope of ‘capital assets’ attracts capital gain. To counter the levy of capital gain arising on sale of urban agricultural land, the exemption under this section has been provided by the Government. The present article explains the provisions of Section 54B of the Income Tax Act, the conditions to be fulfilled for availing exemption, amount of exemption, the consequence on sale of new agricultural land and other relevant provisions.

Conditions For Availing Exemption Under Section 54B

1. Exemption under section 54B is available only to an individual or a HUF;
2. Exemption under section 54B is available only on the sale of urban agricultural land;
3. Exemption is available on both long term capital assets and/or short term capital assets;
4. In order to claim an exemption under section 54B, the urban agricultural land must have been used by the individual or by the parents of the individual for agricultural purpose for the period of at least 2 years prior to the date of transfer. It must be noted that in case of transfer of land by a HUF, land should have been used by any of the members of the HUF;
5. Exemption under section 54B is available only if the taxpayer acquires another agricultural land within a period of two years from the date of transfer. It must be noted that the taxpayer has an option to re-invest in both urban and rural agricultural land;

Amount of Exemption Available Under Section 54B

The exemption would be lower of the following –

1. a) Amount of capital gain accrued on the transfer of urban agricultural land;
2. b) Amount invested in acquiring new agricultural land.

Capital Gain Deposit Account Scheme

Exemption under section 54B of the Income Tax Act, 1961 is available only if the sale proceeds of transferred urban agricultural land is re-invested in acquiring another agricultural land. The new agricultural land is required to be acquired within a period of two years from the date of transfer of urban agricultural land. A situation may arise then the capital gain accrued on account of sale of urban agricultural land is not utilized, in whole or part, for acquiring new agricultural land till the date of filing or income tax return. In such cases, the benefit of exemption can be obtained by depositing the unutilized amount into Capital Gain Deposit Account Scheme.

Consequence on Transfer of Newly Acquired Agricultural Land

In order to avail exemption under section 54B of the Income Tax Act, 1961, the assessee is required to acquire new agricultural land within a period of two years from the date of transfer. Only on fulfilling the said condition, an exemption under section 54B is available. However, the assessee has to face the consequence, in case the newly acquired agricultural land has been transferred within a period of 3 years from the date of its acquisition. The consequence of the transfer of newly acquired agricultural land within a period of 3 years is as under –

While computing capital gain at the time of transfer of new agricultural land, the amount of capital gain which had been claimed as an exemption under Section 54B would be deducted from the cost of acquisition of new agricultural land and the net capital gain would be computed accordingly.

Let us understand the above consequence with an example –

Suppose Mr. X has transferred his urban agricultural land in May 2017. The urban agricultural land has been transferred for an amount of say INR 50,00,000. The capital gain arising on the transfer of the said urban agricultural land is INR 10,00,000. Mr. X, in order to claim an exemption under section 54B of the Income Tax Act, 1961, purchases another urban agricultural land by investing INR 35,00,000 in December 2017. Since the entire amount is re-invested, the capital gain of INR 10,00,000 is claimed as an exemption as per provisions of section 54B of the Income Tax Act, 1961. On March, 2018, Mr. X transfers the newly acquired agricultural land for an amount of say INR 80,00,000. The capital gain to be calculated on the transfer of the new agricultural land would be computed as follows –

Full value of the consideration received                      INR 80,00,000

(-) Cost of acquisition (35,00,000 – 10,00,000) (INR 25,00,000)

Taxable short term capital gain                              INR 55,00,000

In the above example, since the newly acquired agricultural land has been transferred before the expiry of lock-in period of 3 years, the capital gain of INR 10,00,000 claimed as an exemption under section 54B has been reduced from the purchase cost of new agricultural land i.e. INR 35,00,000.