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Article Dated 09th February, 2023

Exemption to capital gains on transfer
of agricultural land

* As amended by Finance Act, 2022

Introduction

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.

Basic conditions

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.

Amount of exemption

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)]

Consequences if the new land is transferred

Exemption under section 54B is available in respect of rollover of capital gains arising on transfer of agricultural land into another agricultural land. However, to keep a check on misutilisation 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 he transfers the new agricultural land within a period of 3 years from the date of its acquisition, than 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.

Illustration

Mr. Rajat sold his agricultural land in April, 2022 for Rs. 25,20,000. Since past 10 years the land was used for agricultural purpose. Long-term capital gain arising on transfer of the land amounted to Rs. 8,40,000. In December, 2022 he purchased another agricultural land worth Rs. 10,00,000. The new land was, however, sold in April, 2023 for Rs. 12,00,000. What will be amount of taxable capital gains in the hands of Mr. Rajat for the financial years 2022-23 and 2023-24?

Computation of capital gains for the financial year 2022-23

Particulars

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 2023-24

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, than the benefit granted earlier under section 54B will be withdrawn.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

Particulars

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 (e.g., brokerage, etc.).

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 these provisions the cost of acquisition of new land will be computed as follows:

Particulars

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

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 utilised (in whole or in part) for purchase of another agricultural land, then the benefit of exemption can be availed by depositing the unutilised 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.

Non-utilisation 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 utilised within the specified period for purchase of another agricultural land, then the unutilised 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.

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