Section 54b of income tax act: Everything you Need to Know

Rural agricultural property does not qualify as a capital asset and is, therefore, exempt from capital gains taxes. Urban agricultural land is only excluded from capital gains tax when the sale earnings are used to purchase further agricultural land. People must pay LTCG or STCG tax, as appropriate, if they don’t reinvest their earnings. The only exceptions to this rule are people and HUFs.

Table of Contents

According to Section 54B of the Income Tax Act, certain requirements must be met for capital gains from the sale of agricultural land to qualify for tax exemption.

Who is eligible to claim exemption under section 54B of the income tax act?

The following requirements must be met by taxpayers to qualify for exemptions under Section 54B:

Taxpayers ought to fall within the person or HUF classification. Companies, LLPs and trusts are not covered by this exception.
The agricultural land in question must have been used for agricultural purposes for two years prior to the transfer by the assesses, their parents or an HUF.
Only when a taxpayer purchases new agricultural land within two years of the transfer may they make an exemption claim.
The newly acquired land has to be in India.

Gains from the sale of rural agricultural land

Agricultural land in rural regions is not regarded as a capital asset. As a result, the issue of imposing a capital gains tax is not raised. Regardless of the price of the particular piece of land, it is relevant.

The distinction between agricultural lands in rural and urban regions has been made by the government with clarity. This distinction may be seen in the document outlining the rules of the 2013 Finance Bill.

All about: Section 54Ec

Gains from the sale of agricultural land in cities

All urban agricultural lands are considered capital assets under Section 54B of the Income Tax Act and are liable to either LTCG or STCG taxes, depending on the holding term. In non-rural regions, agricultural land is treated like any other type of property and is subject to the same taxes.

Tax calculations use the same procedure as those for other capital assets. Before determining the taxation amount, tax authorities subtract the cost of purchase and the cost of improvement from the asset’s selling value.

TDS on agricultural land sales

TDS at a rate of 1% became obligatory on July 1, 2013, for any sale of real estate property with a transaction value of more than Rs 50 lakh. TDS deductions are not necessary for any sale or purchase of agricultural property, nevertheless. The TDS on the property is not subject to Section 194IA, which is not relevant to the sale of agricultural land.

What happens to exemptions when agricultural land is sold?

If the agricultural land under consideration is located in a non-rural location and the entity has reinvested in purchasing another agricultural land, Section 54B of the Income Tax Act permits exemption from capital gains tax. However, in order to avoid the following scenarios, a person must occupy the new land for at least three years.

If the person sold the land within the lock-in period and the cost of the new asset is less than capital gains, the Income Tax Department will revoke the exemption afforded by Section 54B and subject the whole selling value of agricultural property to capital gains taxes.
Exemptions are eliminated if a person sells new land within three years and the cost of the new asset exceeds capital profits. However, while calculating capital gains, the taxpayer may deduct the cost of acquisition.

The IT Department does not rescind the exemptions given when a person sells agricultural land more than three years from the date of purchase, and taxpayers may use index acquisition cost while calculating LTCG on sold agricultural land.

What is capital gains accounts scheme (CGAS)?

There may be instances where taxpayers are unable to use the whole profits from the sale of agricultural land to purchase additional land prior to the deadline for reporting their individual ITRs. The remaining sum can then be put in CGAS in this circumstance. As a result, taxpayers are eligible to make an exemption claim for both the amount spent on construction or purchase of property and the amount placed in CGAS.

However, they must use this money within three years of placing it in CGAS in order to avoid the tax authorities seeing it as an individual’s income. Otherwise, it shall be taxable as income of the last year.

What is the timeframe for utilising the exemption under Section 54B?

The land should be used for agricultural purpose at least for two years. If you hold the land for more than 2 years, it will be considered a long-term capital gain and taxable at 20%. If the holding period is less than 2 years, the gain will be a short-term capital gain and taxable at the slab rate.

Can Section 54B be utilised for purchase of multiple agricultural lands?

Yes, Section 54B can be utilised for purchase of multiple agricultural lands.

Amount of exemption under Section 54B

The amount of exemption is the lower of the amount of capital gain from the transfer or the cost of new agricultural land, including the sum deposited in the Capital Gain Account Scheme.

FAQs

Can NRIs use Section 54B exemption?

Under 54B, NRIs may request exemptions. The sold and new agricultural land must both be located in India, though. The new land must be purchased by an NRI within two years after the selling transaction, among other requirements, including a lock-in term.

What are the LTCG and STCG rates for the property sale?

When taxpayers keep their land for less than 24 months, STCG tax at the appropriate slab rates is applied. However, LTCG, which is taxed at a rate of 20%, will come from sales when people hold onto their land for more than 24 months.

Is capital gains tax applied when the government buys agricultural land?

Any forced takeover or acquisition of agricultural land by the federal or state governments, with RBI approval or government approval, is likewise free from taxation. The Income Tax Act's section 10(37) permits this exemption.

What does the Income Tax Act's Section 54EC mean?

According to Section 54EC, property sales are free from capital gains tax as long as the earnings are reinvested in bonds that the government has already identified within six months. These bonds are issued by NHAI and REC with Rs. 50 lakh maximum investment limit.

What type of asset should you invest in to claim exemption under section 54B?

One can invest in agricultural land (urban or rural) to be eligible to claim income tax exemption under Section 54B.

What happens if the entire capital gain is not invested in purchase or construction of new agricultural land?

The amount of capital gain not invested will be subject to tax as long-term capital gains under section 45.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at [email protected]

Was this article useful?

😃 (0)
😐 (1)
😔 (0)

Priya Banerjee

Priya Banerjee, a writer with a keen eye on the property market, she deciphers the ever-changing trends in residential real estate. Priya excels at simplifying complex real estate terms, making them easy for everyone to understand. Her well-researched advice helps buyers and investors understand complex topics.