Section 54B of ITA, 1961 : Section 54B: Capital Gain On Transfer Of Land Used For Agricultural Purposes Not To Be Charged In Certain Cases

Explanation using Example

Imagine Mr. Sharma, a farmer, owns an agricultural land that he has been using for farming for the past 10 years. In 2022, he decides to sell this land for INR 10,00,000, which results in a capital gain of INR 4,00,000, as the original purchase price was INR 6,00,000.

Under Section 54B of the Income-tax Act, 1961, Mr. Sharma can avoid paying capital gains tax if he purchases new agricultural land within two years of the sale. Let's say he finds a new piece of agricultural land and buys it for INR 5,00,000 within the specified time frame.

Since the capital gain (INR 4,00,000) is less than the cost of the new land (INR 5,00,000), according to Section 54B, the capital gain is not taxed. Moreover, for the purpose of computing any capital gain from the sale of the new land within three years, the cost of the new land for tax purposes would be reduced by the amount of the capital gain, which means the cost would be considered as INR 1,00,000 (INR 5,00,000 - INR 4,00,000).

If Mr. Sharma did not purchase the new land immediately, he could deposit the capital gain of INR 4,00,000 in a specified bank or institution before the due date of his income tax return. If he fails to use this deposited amount to purchase new agricultural land within the two-year period, the unutilized amount would be taxed as income in the year the two-year period ends.