Section 54B Exemption on Capital Gains From Transfer of Agricultural Land

 

The Articles discusses about basic conditions, exemptions under Section 54B of Income Tax Act, 1961 available to individual and HUF against capital gain arising from transfer of agricultural land by investment of capital gain amount in another land or in Capital Gains Deposit Account Scheme.

 

1. Introduction to Section 54B of Income Tax Act

 

A farmer wants to shift his agricultural land for certain reason and hence he sold his old agricultural land and from the sale proceeds he purchased another agricultural land. In this case, the objective of the seller was not to earn income by sale of old land but was to shift to another land. If in this case, the seller was liable to pay income-tax on capital gains arising on sale of old land, then it would be a hardship on him. Section 54B gives relief from such a hardship. Section 54B gives relief to a taxpayer who sells his agricultural land and from the sale proceeds he acquires another agricultural land. The detailed provisions in this regard are discussed in this part.

 

2. Basic Conditions for Availing Exemption Under Section 54B of Income Tax Act

 

Following conditions should be satisfied to claim the benefit of section 54B.

 

• The benefit of section 54B is available only to an individual or a HUF
• The asset transferred should be agricultural land. The land may be a long-term capital asset or short-term capital asset.
• The agricultural land should be used by the individual or his parents for agricultural purpose at least for a period of two years immediately preceding the date of transfer. In case of HUF, the land should be used by any member of HUF.
• Within a period of two years from the date of transfer of old land, the taxpayer should acquire another agricultural land. In case of compulsory acquisition, the period of acquisition of new agricultural land will be determined from the date of receipt of compensation.

 

However, as per section 10(37), no capital gain would be chargeable to tax in case of an individual or HUF if agricultural land is compulsorily acquired under any law and the consideration of which is approved by the Central Government or RBI and received on or after 01-04-2004.

 

Illustration

 

Mr. Raja purchased an agricultural land in April, 2012. Since the date of purchase, the land was being used for agricultural purpose. The land was sold in July, 2018 for Rs. 8,40,000. Capital gain arising on sale of land amounted to Rs. 1,00,000. Can he claim the benefit of section 54B by purchasing another agricultural land?

 

Exemption under section 54B can be claimed in respect of capital gains arising on transfer of capital asset, being agricultural land (may be long term or short term).

 

This benefit is available only to an individual or a HUF. The land should be used for agricultural purpose at least for two years. In this case, all the conditions of section 54B were satisfied and, hence, Mr. Raja can claim the benefit of section 54B by purchasing another agricultural land within the time limit specified under section 54B.

 

Illustration

 

Mr. Kamal purchased an agricultural land in April, 2014. Since the date of purchase, the land was being used for agricultural purpose. The land was sold in May, 2018 for Rs. 18,40,000. Capital gain arising on sale of land amounted to Rs. 2,00,000. Can he claim the benefit of section 54B by purchasing another agricultural land?

 

Exemption under section 54B can be claimed in respect of capital gains arising on transfer of capital asset, being agricultural land (may be long term or short term). This benefit is available only to an individual or HUF.

 

The land should be used for agricultural purpose for at least two years. In this case, all the conditions of section 54B are satisfied and, hence, Mr. Kamal can claim the benefit of section 54B by purchasing another agricultural land within the time limit specified under section 54B.

 

3. Amount of Exemption Under Section 54B of Income Tax Act

 

Exemption under section 54B will be lower of the following:

• Amount of capital gains arising on transfer of agricultural land; or
• Investment in new agricultural land [including the amount deposited in Capital Gains Deposit Account Scheme (discussed later).

 

Illustration

 

Mr. Raja purchased an agricultural land in April, 2012. Since the date of purchase, the land was being used for agricultural purpose.

 

The land was sold in July, 2018 for Rs. 8,40,000. Capital gain arising on sale of land amounted to Rs. 1,00,000. Out of the sale proceeds of old land, he purchased another agricultural land for Rs. 3,00,000 (purchased in August, 2018). What will be the amount of exemption under section 54B which can be claimed by Mr. Raja?

 

Exemption under section 54B can be claimed in respect of capital gains arising on transfer of capital asset, being agricultural land. Exemption under section 54B will be lower of following:

 

• Amount of capital gains arising on transfer of agricultural land; or
• Investment in new agricultural land

 

Considering the above provisions, the exemption in this case will be lower of the following amount:

 

• Amount of capital gain arising on transfer of agricultural land, i.e., Rs. 1,00,000, or
• Amount of investment in new agricultural land, i.e., Rs. 3,00,000

 

Thus, exemption will be Rs. 1,00,000. Taxable capital gain will come to NIL (entire gain will be exempt).

 

4. Consequences Under Section 54B of Income Tax Act if The New Land is Transferred

 

Exemption under section 54B is available in respect of roll over of capital gains arising on transfer of agricultural land into another agricultural land.

 

However, to keep a check on misutilization of this benefit, a restriction is inserted in section 54B. The restriction is in the form of prohibition of sale of the new agricultural land.

 

If a taxpayer purchases new agricultural land to claim exemption under section 54B and subsequently transfers the new agricultural land within a period of 3 years from the date of its acquisition, then the benefit granted under section 54B will be withdrawn. The ultimate impact of the restriction is as follows:

 

• The restriction will be attracted if, after claiming exemption under section 54B, the new agricultural land is sold within a period of 3 years from the date of its purchase.

 

• If the agricultural land is sold within 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 land, the amount of capital gain claimed as exemption under section 54B will be deducted from the cost of acquisition of the new agricultural land.

 

5. Capital Gain Deposit Account Scheme

 

To claim exemption under section 54B, the taxpayer should purchase another agricultural land within a period of two years from the date of transfer of old land.

 

If till the date of filing the return of income the capital gain arising on transfer of the old land is not utilized (in whole or in part) for purchase of another agricultural land, then the benefit of exemption can be availed by depositing the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988 (hereafter referred as Capital Gains Account Scheme). The new land can be purchased by withdrawing the amount from the said account within the specified time limit of 2 years.

 

Illustration

 

Mr. Raj had purchased an agricultural land in April, 2013. Since the day of its purchase, the land was being used for agricultural purpose. This land was sold on 25th August, 2017 for Rs.  8,40,000. Capital gain arising on sale of land amounted to Rs. 2,00,000. He wants to claim exemption under section 54B. By what time he should purchase another agricultural land?

 

To claim exemption under section 54B, the taxpayer should purchase another agricultural land within a period of two years from the date of transfer of old land. In this case, the old land was transferred on 25^th August, 2017. Hence, he has to purchase another land within a period of 2 years from 25th August, 2017 i.e. on or before 24 August, 2019.

 

The old land was transferred in the year 2017-18 and the due date of filing the return of income of the year 2017-18 is 31st July 2018. If Mr. Raj cannot purchase another land by 31st July, 2018, then he has to deposit Rs. 2,00,000 in Capital Gains Account Scheme.  By depositing Rs. 2,00,000 in the Capital Gains Account Scheme, he can claim exemption of Rs. 2,00,000 under section 54B. However, merely depositing in the Capital Gains Account Scheme would not be sufficient. After depositing in the scheme, he has to utilize this fund to purchase new agricultural land within the specified period of 2 years i.e. on or before 24 August, 2019.

 

6. Non-Utilization of Amount Deposited in Capital Gain Deposit Account Scheme

 

If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption is not utilized within the specified period for purchase of another agricultural land, then the unutilized amount (for which exemption is claimed) will be taxed as income by way of long-term capital gains or short-term capital gain (depending upon the nature of original capital gain) for the previous year in which the specified period of 2 years gets over.

 

Illustration

 

Mr. Ramlal had purchased an agricultural land in April, 2013. Since the day of purchase the land was used for agricultural purpose. The land was sold on 25th August, 2017 for Rs. 25,20,000. Capital gain arising on sale of land amounted to Rs.5,00,000.

 

He could not purchase another agricultural land by 31st July, 2018, however, in July, 2018 he deposited Rs. 5,00,000 in Capital Gains Account Scheme. He did not purchase any agricultural land till 24th August, 2019. Will he be entitled to claim any exemption under section 54B? If yes, can the exemption granted be revoked subsequently?

 

To claim exemption under section 54B, the taxpayer should purchase another agricultural land within a period of two years from the date of transfer of old land. In this case, the old land was transferred on 25^th August, 2017, hence, he has to purchase another land within a period of 2 years from 25th August, 2017, i.e., on or before24th August, 2019. The old land was transferred in the year 2017-18 and the due date of filing the return of income of the year 2017-18 is 31st July 2018. Rs. 5,00,000 in Capital Gains Account Scheme.

 

He has to utilize the funds deposited in the scheme to purchase another agricultural land within the specified period of 2 years. The amount withdrawn from the scheme should be used in the purchase of agricultural land. If the amount withdrawn from the scheme is used for any other purpose, then it will be charged to tax as income by way of long-term capital gain or short-term capital gain (depending upon the nature of original capital gain) of the year of withdrawal.

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