Section 54B of the Income Tax Act, 1961, provides a tax exemption on capital gains arising from the transfer of agricultural land, provided the proceeds are reinvested in another agricultural property within a specified period.
1. Eligibility Conditions
✔ Applicable to: Individuals and HUFs (not companies, LLPs, or firms).
✔ Asset Type: Only agricultural land used for farming for at least 2 years before transfer.
✔ Holding Period:
- Long-Term Capital Asset (LTCG): Held for >24 months(20% tax with indexation).
- Short-Term Capital Asset (STCG): Held for ≤24 months(taxed at slab rates).
✔ Reinvestment Window: Must purchase new agricultural land within 2 years of sale.
2. Exemption Calculation
The exemption is the lower of:
- Cost of the new agricultural land, or
- Capital gain from the sale.
Example:
- Sale Price: ₹60 lakh
- Indexed Cost (purchased in 2016-17): ₹39.5 lakh
- Capital Gain: ₹20.5 lakh
- New Land Purchased: ₹45 lakh
- Exemption: ₹20.5 lakh (full gain exempt).
3. Key Conditions & Restrictions
- Lock-in Period: The new land cannot be sold within 3 years(else exemption is revoked).
- Location: Must be in India(rural or urban).
- Compulsory Acquisition: If land is acquired by the government, the 2-year reinvestment period starts from the date of compensation receipt.
4. Capital Gains Account Scheme (CGAS)
If unable to reinvest before filing ITR:
✔ Deposit proceeds in a CGAS account (public sector bank).
✔ Must utilize funds within 3 years, or the amount becomes taxable.
5. Tax Treatment of Rural vs. Urban Agricultural Land
| ASPECT | RURAL AGRICULTURAL LAND | URBAN AGRICULTURAL LAND |
| Capital Asset? | No (exempt from tax) | Yes (taxable) |
| Exemption Available? | No (already tax-free) | Yes (under Section 54B) |
| TDS Applicable? | No | No (even if value > ₹50L) |
Note: Rural land is defined based on distance from municipalities and population density.
6. Recent Changes (AY 2025-26)
- LTCG Tax Rate: Reduced from 20% (with indexation)to 5% (without indexation) for sales after 23rd July 2024.
- ITR Simplification: Taxpayers with LTCG up to ₹1.25L can now file ITR-1/ITR-4.
7. Compliance & Reporting
✔ Disclose in ITR-2 (under “Capital Gains” for urban land).
✔ Rural Land: Report in Schedule EI (exempt income).
✔ Maintain Proof: Sale/purchase deeds, land records, and bank statements.
