Capital Gains Tax on Sale of Agricultural Land | Deduction u/s 54B | Save Tax [2019] | Taxpundit

Agricultural land in Rural Area in India is not considered a capital asset. Therefore any gains from its sale are not taxable under the head Capital Gains. On the other hand, the urban agricultural land being covered within the scope of ‘capital assets’ attracts capital gain. To counter the levy of capital gain arising on sale of urban agricultural land, exemption has been provided under section 54B of the Income Tax Act, 1961 against the same. Conditions For Availing Exemption Under Section 54B :- 1. Exemption under section 54B is available only to an individual or a HUF 2. Exemption under section 54B is available only on sale of urban agricultural land 3. Exemption is available on both long term capital assets and / or short term capital assets 4. In order to claim exemption under section 54B, the urban agricultural land must have been used by the individual or by the parents of the individual for agricultural purpose for the period of at least 2 years prior to the date of transfer. It must be noted that in case of transfer of land by a HUF, land should have been used by any of the member of the HUF 5. Exemption under section 54B is available only if the taxpayer acquires another agricultural land within a period of two years from the date of transfer. It must be noted that the taxpayer has an option to re-invest in both urban and rural agricultural land Exemption would be lower of the following – a) Amount of capital gain accrued on transfer of urban agricultural land b) Amount invested in acquiring new agricultural land In order to avail exemption under section 54B of the Income Tax Act, 1961, the assessee is required to acquire new agricultural land within a period of two years from the date of transfer. Only on fulfilling the said condition, exemption under section 54B is available. However, the assessee has to face the consequence, in case the newly acquired agricultural land has been transferred within a period of 3 years from the date of its acquisition. Consequence on transfer of newly acquired agricultural land within a period of 3 years is as under – While computing capital gain at the time of transfer of new agricultural land, the amount of capital gain which had been claimed as exemption under section 54B would be deducted from the cost of acquisition of new agricultural land and the new capital gain would be computed accordingly.