Section 54B Exemption on Sale of Agricultural Land: Rules, Time Limit

The Income Tax Act adopts a liberal approach towards the taxation of income and activities related to agriculture. Agricultural income in India is exempt from taxation, and rural agricultural land is not regarded as a capital asset, keeping it completely outside capital gain taxation. For activities comprising elements of both agricultural and non-agricultural activities, machinery provisions prescribe means to segregate and exempt agricultural income from taxation. 

Transfer of urban agricultural land has the exclusive benefit of capital gain exemption under Section 54B of the Income Tax Act. 

What is Section 54B of the Income Tax Act?

• Section 54B provides for the capital gain exemption for the sale of urban agricultural land.
• Since rural agricultural land is not considered a capital asset, it is outside the scope of section 54B.
• Individuals and HUFs who have used their land for agricultural activities can claim this exemption.

Who Can Claim This Exemption?

Section 54B exemption is available to:

• Individual taxpayers, and
• Hindu Undivided Families (HUFs)
• Even non-resident taxpayers can claim this exemption.

Eligibility Criteria for Section 54B Exemption

The following are the eligibility criteria to claim exemption under Section 54B

• As mentioned above, the assessee should be an individual or an HUF.
• The land should have been used for agricultural purposes by:
  • The individual himself/ herself (or)
  • The parents of the individual
• In the case of HUF, the family should have used it for agricultural purposes.
• The land should be used for agricultural purposes for any period within 2 years from the date of transfer.
• Rural agricultural land is not covered under this section, as it does not attract any capital gains. 
• Unlike other capital gain exemptions, the section 54B exemption is applicable for both short-term and long-term and long term capital gains.

Conditions and Reinvestment Rules under Section 54B

• The sale proceeds of the land should be used to purchase another agricultural land.
• Purchase of new agricultural land should be made within the due date for filing the return on income (usually 31st July of the next financial year).
• If you are unable to purchase the new land within the due date, you can deposit the exemption amount in the Capital Gains Account Scheme and proceed with the exemption claim.
• If the new agricultural land purchased is sold within 3 years from the date of its purchase, the exemption granted shall be withdrawn.
• The cost of acquisition of the new agricultural land shall be taken as nil, thus taxing the exemption if the 3-year holding condition is not satisfied.
• If the amount spent on the new agricultural land is lower than the capital gains, only the amount actually invested will be eligible for exemption.
• If the cost of new agricultural land is equal to or higher than the capital gains, then the whole capital gain is exempt from taxation.

How to Calculate Exemption under Section 54B?

Exemption under section 54B can be claimed in the following manner:

Note:

• Indexation benefit can still be opted for by resident individuals for agricultural land acquired before 23rd July 2024.
• If the cost of new land is more than the capital gains, the taxable capital becomes zero. Excess purchase cost cannot result in capital losses.

Section 54B Exemption - Example with Calculations

Mr A has purchased an agricultural land on 14th May, 2022, for Rs 15 lakhs. Since then, he has used the land for agricultural purposes. The land under discussion is situated within the municipal limits, hence an urban agricultural land, attracting capital gain implications. He sold the land on 01st January 2026, for Rs 25 lakhs. He used the sale proceeds to purchase another agricultural land for Rs 10 lakh. The capital gain calculations for Mr A under this case are as follows:

 Option -1: Indexation Benefit Availed

Option -2: Indexation Benefit not Availed

Therefore, in the above examples, it is inferred that claiming indexation benefit and capital gain exemption with a tax rate of 20% is more beneficial for the assessee. 

Step-by-Step Guide: How to Claim Section 54B in ITR

You should claim Section 54B exemption under the schedule capital gains of ITR2 or ITR3. Follow these steps diligently to accurately claim the Section 54B exemption in the ITR:

• Firstly, determine whether the capital gain is short-term or long-term.

1. Fill the sale consideration, cost of acquisition and other details in the schedule capital gains.
2. Under the section ‘Information about deduction claimed against capital gains’, fill in the exemption particulars, namely, 
   1. Date of transfer of original asset, 
   2. Cost of new agricultural land, 
   3. Date of purchase, and
   4. Amount deposited into the Capital Gains Account Scheme.
3. Keep the documents such as the sale deed, purchase agreement, proof of the land being used for agricultural purposes, etc, as evidence. 
4. Although these documents are not required to be uploaded with the ITR, they help ensure accurate filing and provide strong evidence in case of any notices.

Section 54B vs Section 54F vs Section 54EC

These sections offer capital gains relief based on the nature of the asset sold, the type of reinvestment made, and the specific conditions attached to each exemption.