Exemption under section 54B on the transfer of agricultural land (as set, 1961 Act, AY 2018-19)

Who can claim it

Section 54B is open to an individual and to a Hindu undivided family (the family was added from assessment year 2013-14, by the footnote to section 54B(1)). It is not available to a firm or a company.

Conditions

1. The asset transferred is land used for agricultural purposes; the gain may be short-term or long-term, as the section does not distinguish between them.
2. During the two years just before the date of transfer, the land was used for agriculture by the individual or a parent of his, or by the Hindu undivided family (section 54B(1)).
3. Within two years after the date of transfer, the assessee buys other land to be used for agricultural purposes (the new asset).

Urban agricultural land is a capital asset, so its sale gives a capital gain; rural agricultural land is not a capital asset at all (section 2(14)), so no gain arises on it and section 54B is not needed.

Amount exempt

• If the cost of the new land is equal to or more than the capital gain, the whole gain is exempt (section 54B(1)(ii)).
• If the cost of the new land is less than the gain, only the difference between the gain and that cost is taxed in the year of transfer (section 54B(1)(i)).

If the new land is sold within three years

If the new land is itself transferred within three years of its purchase, the exemption is in effect taken back. Its cost, for working out the gain on that later sale, is taken as nil where the whole cost was set against the earlier gain, or is reduced by the exempt gain where the gain was smaller than the cost (section 54B(1)(i) and (ii)).

Capital Gains Account Scheme

Gain not used to buy the new land before the return of income is filed must be deposited in an account under the scheme notified by the Central Government, not later than the due date of the return under section 139(1), and proof of the deposit sent with the return (section 54B(2)). The amount used plus the amount deposited counts as the cost of the new land. If the deposit is not used for buying land within the two years, the unused part is taxed as capital gain of the previous year in which the two years end (proviso to section 54B(2)).

Example

Mr. Harpreet sold urban farmland, cultivated by him for the last six years, on 1 August 2017 at a capital gain of ₹12,00,000. He bought new farmland for ₹9,00,000 on 1 March 2018. The exemption is ₹9,00,000 and ₹3,00,000 is taxable for assessment year 2018-19. If he sells the new land in 2019, its cost for that sale is nil.