Friday, August 19, 2016

Section 54B Exemption on Capital Gains from Transfer of Agricultural Land

The Articles discusses about Basic conditions, Exemption Under Section 54B of Income Tax Act, 1961 available to Individual and HUF against Capital Gain Arising from Transfer of Agricultural Land by investment of Capital Gain amount in another land or in Capital Gains Deposit Account Scheme.

Introduction

A farmer wants to shift his agricultural land for certain reason and hence he sold his old agricultural land and from the sale proceeds he purchased another agricultural land. In this case the objective of the seller was not to earn income by sale of old land but was to shift to another land. If in this case, the seller was liable to pay income-tax on capital gains arising on sale of old land, then it would be a hardship on him.

Section 54B gives relief from such a hardship. Section 54B gives relief to a taxpayer who sells his agricultural land and from the sale proceeds he acquires another agricultural land. The detailed provisions in this regard are discussed in this part.

Basic conditions
Following conditions should be satisfied to claim the benefit of section 54B.
The benefit of section 54B is available only to an individual or a HUF
The asset transferred should be agricultural land. The land may be a long-term capital asset or short-term capital asset.
The agricultural land should be used by the individual or his parents for agricultural purpose at least for a period of two years immediately preceding the date of transfer. In case of HUF the land should be used by any member of HUF.
Within a period of two years from the date of transfer of old land the taxpayer should acquire another agricultural land. In case of compulsory acquisition the period of acquisition of new agricultural land will be determined from the date of receipt of compensation. However, as per section 10(37), no capital gain would be chargeable to tax in case of an individual or HUF if agricultural land is compulsorily acquired under any law and the consideration of which is approved by the Central Government or RBI and received on or after 01-04-2004.

Illustration

Mr. Raja purchased an agricultural land in April, 2011. Since the date of purchase, the land was being used for agricultural purpose. The land was sold in July, 2016 for Rs. 8,40,000. Capital gain arising on sale of land amounted to Rs. 1,00,000. Can he claim the benefit of section 54B by purchasing another agricultural land?

**

Exemption under section 54B can be claimed in respect of capital gains arising on transfer of capital asset, being agricultural land (may be long-term or short-term).

This benefit is available only to an individual or a HUF. The land should be used for agricultural purpose at least for two years. In this case, all the conditions of section 54B were satisfied and, hence, Mr. Raja can claim the benefit of section 54B by purchasing another agricultural land within the time-limit specified under section 54B.

Illustration

Mr. Kamal purchased an agricultural land in April, 2013. Since the date of purchase, the land was being used for agricultural purpose. The land was sold in May, 2016 for Rs. 18,40,000. Capital gain arising on sale of land amounted to Rs. 2,00,000. Can he claim the benefit of section 54B by purchasing another agricultural land?

**

Exemption under section 54B can be claimed in respect of capital gains arising on transfer of capital asset, being agricultural land (may be long-term or short-term). This benefit is available only to an individual or HUF.

The land should be used for agricultural purpose for at least two years. In this case, all the conditions of section 54B are satisfied and, hence, Mr. Kamal can claim the benefit of section 54B by purchasing another agricultural land within the time-limit specified under section 54B.

Illustration

Raja HUF purchased an agricultural land in June, 2013. Since the date of purchase, the land was being used for agricultural purpose. The land was sold in July, 2016 for Rs. 28,40,000. Capital gain arising on sale of land amounted to Rs. 8,00,000. Can the HUF claim the benefit of section 54B by purchasing another agricultural land?

**

Exemption under section 54B can be claimed in respect of capital gains arising on transfer of capital asset, being agricultural land (may be long-term or short-term). This benefit is available only to an individual or HUF. The land should be used for agricultural purpose for at least two years. In this case all the conditions of section 54B are satisfied and, hence, Raja HUF can claim the benefit of section 54B by purchasing another agricultural land within the time-limit specified under section 54B.

Illustration

Mr. Kumar purchased gold in April, 2011 and sold the same in July, 2016 for Rs. 8,40,000. Capital gain arising on sale of gold amounted to Rs. 1,00,000. Can he claim the benefit of section 54B by purchasing agricultural land from the capital gain of Rs. 1,00,000?

**

Exemption under section 54B can be claimed in respect of capital gains arising on transfer of a capital asset, being agricultural land (may be long-term or short-term). In this case the capital asset is gold, i.e., other than agricultural land and, hence, the benefit of section 54B is not available.

Amount of exemption

Exemption under section 54B will be lower of the following:
Amount of capital gains arising on transfer of agricultural land; or
Investment in new agricultural land [including the amount deposited in Capital Gains Deposit Account Scheme (discussed later)].

Illustration

Mr. Raja purchased an agricultural land in April, 2011. Since the date of purchase, the land was being used for agricultural purpose.

The land was sold in July, 2016 for Rs. 8,40,000. Capital gain arising on sale of land amounted to Rs. 1,00,000. Out of the sale proceeds of old land, he purchased another agricultural land for Rs. 3,00,000 (purchased in August, 2016). What will be the amount of exemption under section 54B which can be claimed by Mr. Raja?

**

Exemption under section 54B can be claimed in respect of capital gains arising on transfer of capital asset, being agricultural land. Exemption under section 54B will be lower of following :
Amount of capital gains arising on transfer of agricultural land; or
Investment in new agricultural land

Considering the above provisions, the exemption in this case will be lower of the following amount :
Amount of capital gain arising on transfer of agricultural land, i.e., Rs. 1,00,000 or
Amount of investment in new agricultural land, i.e., Rs. 3,00,000

Thus, exemption will be Rs. 1,00,000. Taxable capital gain will come to Nil (entire gain will be exempt).

Illustration

Mr. Kaushal purchased an agricultural land in April, 2011. Since the date of purchase, the land was being used for agricultural purpose. The land was sold in July, 2016 for Rs. 18,40,000. Capital gain arising on sale of land amounted to Rs. 4,00,000. Out of the sale proceeds of old land, he purchased another agricultural land for Rs. 3,00,000 (in August, 2016). What will be the amount of exemption under section 54B which can be claimed by Mr. Kaushal?

**

Exemption under section 54B can be claimed in respect of capital gains arising on transfer of capital asset, being agricultural land. Exemption under section 54B will be lower of following :
Amount of capital gains arising on transfer of agricultural land, or
Investment in new agricultural land

Considering the above provisions, the exemption in this case will be lower of the following amount :
Amount of capital gain arising on transfer of agricultural land, i.e., Rs. 4,00,000 or
Amount of investment in new agricultural land, i.e., Rs. 3,00,000

Thus, exemption will be Rs. 3,00,000. Taxable capital gain will come to Rs. 1,00,000 (i.e., Rs. 4,00,000 less Rs. 3,00,000).

Consequences if the new land is transferred

Exemption under section 54B is available in respect of rollover of capital gains arising on transfer of agricultural land into another agricultural land. However, to keep a check on misutilisation of this benefit a restriction is inserted in section 54B. The restriction is in the form of prohibition of sale of the new agricultural land.

If a taxpayer purchases new agricultural land to claim exemption under section 54B and subsequently he transfers the new agricultural land within a period of 3 years from the date of its acquisition, than the benefit granted under section 54B will be withdrawn. The ultimate impact of the restriction is as follows:
The restriction will be attracted if, after claiming exemption under section 54B, the new agricultural land is sold within a period of 3 years from the date of its purchase.
If the agricultural land is sold within a period of 3 years from the date of its purchase, then at the time of computation of capital gain arising on transfer of the new land, the amount of capital gain claimed as exemption under section 54B will be deducted from the cost of acquisition of the new agricultural land.

Illustration


Mr. Rajat sold his agricultural land in April, 2015 for Rs. 25,20,000. Since past 10 years the land was used for agricultural purpose. Long-term capital gain arising on transfer of the land amounted to Rs. 8,40,000. In December, 2015 he purchased another agricultural land worth Rs. 10,00,000. The new land was, however, sold in April, 2016 for Rs. 12,00,000. What will be amount of taxable capital gains in the hands of Mr. Rajat for the financial years 2015-16 and 2016-17?

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