A farmer decided to sell his old farm and use the proceeds to buy new farmland because he needed to relocate his agricultural land for a specific reason. In this instance, the seller’s goal was to transfer to new land rather than to make money by selling the old land. It would be difficult for the seller if in this situation capital gains from the sale of old land were subject to income tax. Land as an asset, whether agricultural land or not, has particular implications of GST. GST on real estate is an important starting point to understand this article in depth
A relief from such hardship is provided by Section 54B. A taxpayer who sells his agricultural land and uses the proceeds to buy another agricultural land is given relief under Section 54B. This article talks about the specific rules in this regard.
What does Section 54B of the Income Tax Act entail?
- The taxpayer and his family use the agricultural land that was sold as part of their capital assets for farming. As the original asset, the same piece of land would be mentioned.
- The taxpayer purchased agricultural land in order to avoid paying capital gains tax within two years of the original asset transfer date.
- The difference would be subject to tax pursuant to section 45 of the act when the capital gain tax is higher than the land cost that the taxpayer brought. When the new asset would have been sold for a period of three years, the land cost would be considered NIL and the entire sales consideration would be subject to tax.
- The capital gain is exempt from taxation if the amount is less than or equal to the value of the new asset. The capital gain amount that results from the sale of the new asset will be deducted from the land cost after the new asset has been sold for a period of three years.
- The central government’s plan calls for the retained in the bank account of the taxpayer any capital gain that is not used by the taxpayer for the acquisition of a new asset prior to the filing return date u/s 139(1). The sum that the taxpayer invested in the bank along with the amount that was deposited there will be considered the cost of the new asset.
- In the event that the taxpayer does not use the money deposited with the bank to purchase new assets within the time frame specified in subsection (1) of the Act, the money that has not been used will be taxed under section 45 of the Act based on the taxpayer’s income from the prior year during which the two-year period expired.
- The taxpayer may withdraw these sums from the bank by presenting the bank with proof of the purchase of the property or of the tax challan, along with the heads who will issue the bank with a certificate for the amount to be withdrawn.
The Capital Gain Deposit Account Program
Within two years of the date of transfer of the old land, the taxpayer must buy another agricultural piece of land in order to qualify for the exemption under section 54B.
In accordance with the Capital Gains Deposit Accounts Scheme, 1988, the benefit of exemption can be obtained by depositing the unused amount in a Capital Gains Deposit Account Scheme in any branch of a public sector bank if the capital gain arising from the transfer of the old land has not been used (in whole or in part) for the purchase of another agricultural land as of the date of filing the return of income. Withdrawing the money from the account in question within the allotted two-year window will allow you to purchase the new land.
Capital Gain Deposit Account Scheme: Non-Utilization of Deposited Amount
The unutilized amount (for which the taxpayer has claimed exemption) will be taxed as income by way of long-term capital gains or short-term capital gains (depending on the nature of the original capital gain) for the previous year in which the specified period of 2 years expires if the money deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption is not used within the specified period for the purchase of another agricultural land.
Section 54B penalties in the event that the new land is transferred
Rollover of capital gains from the transfer of one agricultural property into another agricultural property is eligible for the exemption provided by section 54B. But section 54B now includes a restriction to prevent improper use of this benefit. The restriction takes the form of a ban on the sale of new agricultural land.
In order to qualify for an exemption under section 54B, a taxpayer must purchase new agricultural land. If the taxpayer transfers the new agricultural land within three years of the date of acquisition, the exemption under section 54B will no longer be available. As a result of the restriction, the following results will be achieved:
- After claiming an exemption under section 54B, the restriction will be triggered if the newly purchased agricultural land is sold within three years of the date of purchase.
- The amount of capital gain claimed as an exemption under section 54B will be subtracted from the cost of acquiring the new agricultural land if the agricultural land is sold within three years of the date of purchase and the capital gain arising on transfer of the new land is computed.