Section 54B of Income Tax Act 1961 – Decoded!

Section 54B of Income Tax Act 1961 applies to an individual or Hindu Undivided Family. Section 54B provides for tax exemption on capital gain that arises from sale of agricultural land (original asset) provided that

1. The land was being used by the assessee or his parents for agricultural purposes for atleast last 2 years immediately preceding the date on which the land was transferred, and

2. The long term capital gain is invested by the assessee in another land (new asset) for being used for agricultural purposes, within 2 years after the date of transfer of original asset

For the purpose of Section 54B

Original Asset – Long term asset of agricultural land that is sold after minimum 3 years from its date of acquisition.

New Asset – Agricultural land (urban or rural) that is purchased by assessee by investing capital gain amount of original asset.

Read our detailed article – Capital Gain Tax on Sale of Property, to learn about calculation of short term and long term capital gain.

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Exemption Amount under Section 54B of Income Tax Act 1961

Under Section 54B of Income Tax Act, exemption on capital gain can be claimed upto the extent it is invested in the purchase of agricultural land (new asset). This can be elaborated further as follows:

  • If Capital Gain < Cost of New Asset, then entire Capital Gain Amount is exempted, and
  • If Capital Gain > Cost of New Asset, then you can claim exemption upto the cost of new asset.

Capital Gains Account Scheme

If you are not able to purchase new asset within the financial year in which you sold the original asset, you can deposit your capital gain amount in a special Capital Gain Account provided by many PSU banks. Amount deposited in CGAS account is not taxable until 2 years from the date of transfer of original asset. If you do not purchase new agricultural land within 2 years of sale of original asset, you will have to pay long term capital gain tax.

You can deposit amount in CGAS account before the last date of filing Income Tax returns for the financial year in which original asset is sold.

Check out this detailed guide on Capital Gain Account Scheme to learn about types of CGAS accounts, the process of opening an account and other details about CGAS account.

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