Exemption for capital gains on transfer of agricultural land

When the question arises

Agricultural land in a rural area is not a capital asset at all, so its sale gives no capital gain. Agricultural land in an urban area (within a municipality or cantonment of 10,000 or more people, or within the specified distance of one) is a capital asset, and its sale gives a capital gain. Section 54B of the Income-tax Act, 1961, now section 83 of the Income-tax Act, 2025, exempts that gain if it is reinvested in agricultural land, so that a farmer moving his farming elsewhere is not taxed.

Conditions (section 83(1))

1. Assessee: an individual or a Hindu undivided family.
2. Original asset: land that was used for agricultural purposes by the assessee or a parent (or by the family) during the two years immediately before the transfer. The gain may be short-term or long-term.
3. New asset: other land for agricultural purposes, rural or urban, purchased within two years after the transfer. There is no limit on its location.

Amount exempt

• If the cost of the new land is equal to or more than the capital gain, the whole gain is exempt.
• If it is less, the gain is taxed to the extent it exceeds the cost of the new land.

So the exemption is the lower of the capital gain and the cost of the new land.

Capital gains account scheme (section 83(2)-(4))

If the gain is not used to buy the new land before the return is filed, the unused amount must be deposited in the capital gains account scheme before the return is filed and in any case by its due date (section 263(1)), and the proof filed with the return. The amount used plus the deposit counts as the cost of the new land. Any part of the deposit not used within two years of the transfer is taxed as capital gain of the year in which those two years from the transfer end, and the assessee may then withdraw that unused amount under the scheme (section 83(4)).

Transfer of the new land within three years (section 83(1)(i)-(ii))

If the new land is sold within three years of its purchase, the exemption is withdrawn by reducing its cost: by the whole exempt gain (cost taken as nil if the gain exceeded the cost), so a larger gain arises on the new land. This applies only if the new land is itself a capital asset (urban agricultural land).

A related exemption: compensation for compulsory acquisition of urban agricultural land used by an individual or a Hindu undivided family (or a parent) for two years is fully excluded (Schedule III, Sl. No. 18; formerly section 10(37)).

Illustration (our own)

Mr. Gill sells urban agricultural land, farmed by his father and then by him for the last ten years, on 1 June 2026, with a long-term capital gain of ₹30,00,000. On 15 March 2027 he buys agricultural land in a village for ₹22,00,000, and deposits ₹8,00,000 in the capital gains account scheme before filing his return. The cost of the new asset is ₹30,00,000, so the whole gain is exempt. If he uses only ₹5,00,000 of the deposit by 1 June 2028, the unused ₹3,00,000 is taxed as capital gain of tax year 2028-29, in which two years from the transfer end.