Applicability of Sec 54B of Income Tax Act
Section 54B of Income Tax Act, deals with the exemption in respect of capital gains arising on transfer of capital assets, being agriculture land (short term or long term) situated in rural area.
Conditions for claiming benefits:
- Available only to individuals and HUF.
- The agricultural land should be used by an 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.
- The taxpayer should acquire new agriculture land within a period of two years from the date of transfer of agricultural land.
In case of compulsory acquisition, the period of acquisition of new agricultural land will be considered from the date of receipt of compensation.
Amount of exemption:
Exemption U/s 54B of Income Tax Act will be lower of the two-
- Amount of capital gain arising of transfer of agricultural land; or
- Investment in new agricultural land. (Including amount deposited in Capital Gain Deposit Account Scheme.)
Capital Gain Deposit Account Scheme
As per Income Tax Act, the taxpayer is allowed sometime (2-3 years) to invest the capital gains in specified instruments.
If till the date of filing the return of income the capital gain arising on transfer of the old land is not utilized (in whole or in part) for purchase of another agricultural land, then the benefit of exemption can be availed by depositing the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme. The new land can be purchased by withdrawing the amount from the said account within the specified time-limit of 2 years.
The exemption claimed earlier will be taxable in the following two cases:
- Non-utilization of amount deposited in Capital Gain Deposit Account Scheme
If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption is not utilized within the specified period for purchase of another agricultural land, then the unutilized amount (for which exemption is claimed) will be taxed as income by way of long-term capital gains or short-term capital gain (depending upon the nature of original capital gain) for the previous year in which the specified period of 2 years gets over.
- Transfer of new agriculture land
After acquiring the new agricultural land, if the new agricultural land is transferred within a period of 3 years from the date of purchase, then the tax exemption allowed earlier would be withdrawn. In such a case, the assessee would be required to pay tax on the exemption claimed earlier.
Apart from exemption U/s 54B of Income Tax Act available for reinvestment in agricultural land, the seller can also claim Capital Gains exemption U/s 54EC by reinvesting in specified bonds. The seller can also claim exemption U/s 54F for reinvestment in a residential house.