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On transfer of land, a capital gain arises and the seller has to pay capital gain tax on the capital gain so arises under section 45 of the Income Tax Act, 1961. But if the land transferred was used for the purpose of agriculture, then the seller can claim exemption under section 54B of the Income Tax Act, 1961. Let us discuss in detail about section 54B.

Applicability of Section 54B

The following conditions must be satisfied to claim benefit of Section 54B-

  1. Section 54B is applicable only to Individual and HUF
  2. The land must have been utilized for agricultural purposes either by the individual or his parents or the Hindu Undivided Family in two years immediately preceding the date of transfer.
  3. The assessee must purchase a new land which shall be utilized for the purpose of agriculture within a period of two years from the date of transfer.

Amount of Exemption

The amount of exemption provided under section 54B shall be lower of-

  1. The amount of Capital Gain arising on transfer or
  2. The cost of new agricultural land including the amount deposited in the Capital Gain Account Scheme.
Sec 54B - Exemption From Capital Gain on Transfer of Land used for Agricultural Purposes

Consequences of transferring the New Land

The exemption under section 54B is available only if the capital gain arising on transfer of land used for agricultural purpose is utilized for purchasing another land which will be utilized for the purpose of agriculture. However, to avoid the misutilization of the benefit of this section, a restriction has been inserted in Section 54B.

The section restricts transfer of new land within a period 3 years from the date of its purchase.

If the new land is transferred within the said period then it shall be dealt in the following manner-

  1. The entire capital gain on transfer of original asset was invested in the new land, then while computing capital gain arising on transfer of new land, the earlier capital gain shall be reduced from the cost of new land.
  2. The capital gain on transfer of original asset was partly invested in the new land, then while computing the capital gain arising on transfer of new land, the cost of the new land shall be taken as nil.
 

Illustration

Mr. Raheja sold his agricultural land in April, 2020 for Rs. 25,20,000/-. For the past 10 years the land was used for agricultural purposes. Long-term capital gain arising on transfer of the land amounted to Rs. 8,40,000/-. In December, 2020, he purchased another agricultural land worth Rs. 10,00,000/-. The new land was however, sold in April, 2021 for Rs. 12,00,000/-. What will be the amount of taxable capital gains in the hands of Mr. Raheja for the financial years 2020-21 and 2021-22?

 

Computation of capital gains for the financial year 2020-21

Particulars

Amount(Rs)

Long-term capital gain arising on transfer of old land

8,40,000

Less: Exemption under section 54B (*)

8,40,000

Taxable Long-Term Capital Gains

Nil

(*) 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. 8,40,000 or
  • Amount of investment in new agricultural land, i.e., Rs. 10,00,000

Thus, exemption will be Rs. 8,40,000.

Computation of capital gains for the year 2021-22

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 earlier granted under section 54B will be withdrawn. The computation in this case will be as follows :

Particulars

Amount(Rs)

Full value of consideration (i.e., Sales value of new agricultural land)

12,00,000

Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset

Nil

Net sale consideration

12,00,000

Less: Cost of acquisition (*)

1,60,000

Short- term capital gains on sale of new agricultural land

10,40,000

(*) 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 the new agricultural land. Applying this provisions the cost of acquisition of new land will be computed as follows :

Particulars

Amount(Rs)

Cost of acquisition of new land

10,00,000

Less: Exemption claimed earlier under section 54B

8,40,000

Cost of new land to be used while computing capital gain

1,60,000

Capital Gain Deposit Account Scheme

The amount of capital gain,to the extent not utilised in purchasing the new land before the due date of filing return under section 139(1)shall be deposited in the Capital Gain Deposit Account Scheme.

If the amount deposited in the Capital Gain Deposit Account Scheme is not wholly or partly utilized for the purchase of new land within a period of two years from the date of transfer, then the unutilized amount shall be taxed as income of the previous year in which the period of two years from the date of transfer expires under section 45 of the Income Tax Act, 1961.

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Category Income Tax, Other Articles by - Neethi V. Kannanth 



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