Selling agricultural land often raises doubts about how much income tax you need to pay. The good news is that in certain cases, the law provides tax relief. Knowing the rules clearly will help you avoid unnecessary stress and make better financial decisions.
Under the Income Tax Act, you can save tax on the capital gains you earn from selling agricultural land. If the amount is reinvested in buying another agricultural land, the entire capital gain can be exempted from tax. This benefit is available to both individuals and Hindu Undivided Families (HUFs) under Section 54B of the Income Tax Act.
What is Section 54B?
Section 54B of the Income Tax Act provides tax relief on both short-term and long-term capital gains from the transfer of agricultural land. For the financial year 2024-25 (assessment year 2025-26), this section allows individuals and HUFs to save tax when selling agricultural land, especially land located in urban areas.
To claim this benefit, the seller must purchase new agricultural land within two years of selling the old one. The exemption amount will be the lower of:
- the profit (capital gain) from the sale, or
- the amount invested in the new agricultural land.
Even if you are unable to buy new land immediately, you can deposit the amount in a Capital Gains Account Scheme (CGAS) and still claim the exemption.
If you earn ₹8 lakh profit from selling agricultural land and invest ₹6 lakh in new land within two years, you’ll get a tax exemption of ₹6 lakh.
How Much Tax Exemption Can You Get?
To qualify for tax exemption under Section 54B, the land you sell must have been used for agricultural purposes for at least two years before the sale. This condition applies whether the land was owned by you, your parents, or a Hindu Undivided Family (HUF).
The exemption is available if the sale proceeds are used to purchase new agricultural land. The new land must be bought within two years from the date of selling the old land.
If, at the time of filing your Income Tax Return, you have not yet purchased new land, you can deposit the unutilized amount in a Capital Gains Deposit Account Scheme (CGAS). Later, you can withdraw this money to buy agricultural land within the two-year period and still claim the tax relief.
If you sold land in April 2024, you must either buy new agricultural land or deposit the gain in a CGAS before July 2025 (ITR filing deadline). You can then use that amount any time up to April 2026 to purchase new land and claim the exemption.
When Do You Lose the Tax Exemption?
The tax relief under Section 54B is not permanent. You may lose the exemption in the following situations:
- Selling the new land within 3 years: If you sell the newly purchased agricultural land within three years of buying it, the exemption you claimed earlier will be reversed. The exempted amount will be added back to the capital gains of the year in which you sell the new land, and you will have to pay tax on it.
- Not using CGAS funds within 2 years: If you deposited the sale proceeds in a Capital Gains Account Scheme (CGAS) but did not use it to buy new agricultural land within two years, the unused amount will be treated as long-term capital gains. You will then have to pay tax on that amount.
Suppose you sold land, claimed exemption under Section 54B, and bought new agricultural land. If you sell this new land within 2 years, the earlier tax benefit will be taken back and added to your taxable income.