Section 54B of the Income Tax Act: A Comprehensive Guide
The Income Tax Act has several provisions that allow taxpayers to avoid tax payments. Section 54B of the Income tax Act is one such example. As per this Section, capital gains earned from the sale of agricultural land are eligible for tax exemption, subject to conditions. Rural agricultural land does not come under capital assets and hence is not subject to capital gains taxation. Urban agricultural land is exempt from capital gains taxation only when one reinvests such proceeds of such sale to buy another agricultural land.
However, if persons do not reinvest their proceeds, they will have to pay LTCG /STCG tax, as the case may be. This exemption is only applicable to individuals and HUFs.
When Can One Claim Exemption under Section 54B of the Income Tax Act?
Here is a list of conditions that taxpayers must fulfil to claim exemptions u/s 54B of the IT Act:
- Taxpayers should belong to the individual or HUF category. This exemption is not applicable to companies, LLPs, and trusts.
- The agricultural land under question must be in use for agricultural purposes by assesses/their parents or an HUF for 2 years before such transfer has taken place.
- A taxpayer can claim exemption only when he/she buys a new agricultural land within 2 years of such transfer.
- The new land purchased must be in India.
Capital Gains on Sale of Agriculture Land in Rural Areas
Agricultural land in rural areas is specifically not considered a capital asset. Hence, the question of levying capital gains tax does not arise. It is applicable irrespective of the value of the land in question.
The government has clearly differentiated between agricultural lands in rural areas and agricultural land in urban areas. One can find this distinction in the memorandum explaining the provisions of the Finance Bill, 2013.
Capital Gains on Sale of Agricultural Land in Urban Areas
According to provisions of Section 54b of the Income Tax Act, all agricultural lands in urban areas come under capital assets and are subject to taxation as per LTCG or STCG, depending on the holding period. Agricultural land in non-rural areas is considered as any other property and taxed accordingly.
The process of tax computation is the same as any other capital asset. Tax authorities deduct the cost of acquisition and cost of improvement from the sale value of the asset before arriving at the taxation amount.
Also Read: Deductions Under Section 80C Of The Income Tax
TDS on Sale of Agricultural Land
Starting July 1 2013, TDS at the rate of 1% was mandatory for any sale of real estate property whose transaction value is more than Rs. 50 lakh. However, any sale or purchase of agricultural property is not subject to TDS deductions.
Section 194IA, which deals with TDS on the property, is not applicable to the sale of agricultural land.
What Happens to Exemptions in Case of Sale of Agricultural Land?
Section 54B of the Income Tax Act allows exemption from capital gains tax in case the agricultural land under consideration is located in a non-rural area, given the entity has reinvested in buying another agricultural land. However, an individual must keep the new land in his/her possession for at least 3 years, or else the following situations can arise:
- If the individual has sold the land within the lock-in period and the cost of the new asset is less than capital gains, then the Income Tax Department will revoke the exemption granted u/s 54B, and the total sale value of agricultural land will come under capital gains taxation.
- If an individual has sold new land within 3 years and the cost of the new asset is more than capital gains, exemptions given are withdrawn. However, the taxpayer can claim the cost of acquisition while determining capital gains.
When an individual sells agricultural land after 3 years from the date of purchase, the IT Department does not revoke the exemptions granted, and taxpayers can claim index acquisition cost while determining LTCG on agricultural land sold.
Also Read: How To Pay Income Tax Online?
What Is a Capital Gains Account Scheme?
There may be a situation in which taxpayers may not be able to utilise the total sale proceeds from the sale of agricultural land to buy another land before the due date of filing their respective ITR. In such a situation, the remaining amount can be deposited in CGAS. Consequently, taxpayers can claim exemption on the spent amount as well as the amount deposited in CGAS.
However, they need to utilise this amount within 3 years of depositing in CGAS or else tax authorities will treat it as an income of the individual.
Final Word
HUF and individuals can claim exemptions on capital gains tax under Section 54B of the Income Tax Act. However, they must keep their new purchase till the lock-in period or else the IT Department may withdraw exemptions granted to taxpayers.
FAQs On Section 54B Of Income Tax Act
Ans: NRIs can claim exemptions under 54B. However, the land sold and the new agricultural land purchased must be in India. All other conditions like lock-in period and NRI must purchase the new land within 2 years of sale transaction.
Ans: Whenever taxpayers are holding their land for less than 24 months, STCG tax is applicable at respective slab rates. However, when persons are holding their land for more than 24 months, the sale will result in LTCG, which will be taxed at a rate of 20%.
Ans: Any forcible acquisition or takeover of agricultural land by the Central Government or state government whose consideration is either approved by RBI or government itself is also exempt from tax. The section that allows this exemption is 10(37) of the Income Tax Act.
Ans: Section 54EC involves exemption from capital gains tax on sale of property provided that the proceeds are again reinvested in specific bonds notified by the Government within 6 months. The upper limit for investment in such bonds is Rs. 50 lakh, and NHAI and REC issues these bonds.
Ans: There are two types of deposits available under CGAS:
Savings deposit: This is like any other savings account in a bank. Individuals will receive interest similar to a bank account quarterly, and it offers better liquidity.
Term deposit: This works like a normal term deposit in any financial institution. One receives timely interest, and there are restrictions on withdrawals like a normal term deposit. The maximum time for such a deposit is 3 years.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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