Imagine Mr. Sharma has a piece of agricultural land on the outskirts of Pune that his family has been farming for years. He sells it and makes a profit. Should that profit be taxed? Section 54B says: not necessarily — if he buys another agricultural land within 2 years, the capital gain gets exempted. This is the government's way of saying: "We don't want farmers losing their livelihood just because land prices went up."
Who can claim it? Only an Individual or HUF — not a company, not a firm. The land must have been used for agricultural purposes by the assessee, or their parent (a unique provision!), for at least 2 years immediately before the date of sale. The new land purchased must also be for agricultural use — you can't buy a plot to build a house and claim this exemption.
How much is exempt? If the capital gain is ₹40 lakhs and you buy new agricultural land for ₹40 lakhs or more — full exemption, no tax. If you buy land for only ₹25 lakhs — you pay tax on the remaining ₹15 lakhs. The new land's cost is reduced by the exempted gain for future capital gains purposes; if sold within 3 years, that cost is treated as nil (sub-clause i scenario) or reduced (sub-clause ii). This 3-year lock-in is frequently tested.
What if you haven't bought the land before filing your ITR? Deposit the unused gain in the Capital Gains Account Scheme (CGAS) with a designated bank before the due date of filing. This amount is treated as if you've already purchased the land. If you don't use the CGAS deposit within 2 years to buy land, it becomes taxable in the year the 2-year window expires — not the year of sale. This timing distinction is a favourite MCQ trap. This section is asked frequently as a 4-mark or 8-mark question in CA Inter exams.
Example 1 — Full Exemption
Ms. Iyer (Individual) sells agricultural land on 1st July 2024 for ₹75,00,000. She had been farming this land since 2019. Her indexed cost of acquisition is ₹35,00,000. She purchases new agricultural land on 15th March 2025 for ₹45,00,000.
| Particulars | Amount |
|---|---|
| Sale Price | ₹75,00,000 |
| Less: Indexed Cost | ₹35,00,000 |
| Long-Term Capital Gain | ₹40,00,000 |
| Cost of new agricultural land | ₹45,00,000 |
| Capital gain ≤ Cost of new land? | Yes (₹40L < ₹45L) |
| Exemption u/s 54B | ₹40,00,000 |
| Taxable Capital Gain | NIL |
Cost of new land for future reference = ₹45,00,000 − ₹40,00,000 = ₹5,00,000 (if sold within 3 years).
---
Example 2 — Partial Exemption with CGAS
Rajesh (HUF) sells agricultural land on 1st Sept 2024, making a capital gain of ₹60,00,000. He purchases new agricultural land for ₹35,00,000 in January 2025. His ITR due date is 31st July 2025. He deposits the remaining ₹25,00,000 in CGAS on 28th July 2025.
| Particulars | Amount |
|---|---|
| Capital Gain | ₹60,00,000 |
| Land purchased | ₹35,00,000 |
| Deposited in CGAS | ₹25,00,000 |
| Deemed cost of new asset (for 54B) | ₹35L + ₹25L = ₹60,00,000 |
| Exemption u/s 54B | ₹60,00,000 |
| Taxable Capital Gain | NIL |
If Rajesh fails to use the ₹25,00,000 CGAS deposit to buy land within 2 years of the original sale (i.e., by 1st Sept 2026), ₹25,00,000 becomes taxable as capital gain in FY 2026-27 (the year 2 years expire).
📖 Bare Act text — Section 54B, Income Tax Act 1961
(click to expand)
(1) Subject to the provisions of sub-section (2), where the capital gain arises from the transfer of a capital asset being land which, in the two years immediately preceding the date on which the transfer took place, was being used by the assessee being an individual or his parent, or a Hindu undivided family for agricultural purposes (hereinafter referred to as the original asset), and the assessee has, within a period of two years after that date, purchased any other land for being used for agricultural purposes, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—(i) if the amount of the capital gain is greater than the cost of the land so purchased (hereinafter referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase, the cost shall be nil; or(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase, the cost shall be reduced, by the amount of the capital gain.(2) The amount of the capital gain which is not utilised by the assessee for the purchase of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase of the new asset within the period specified in sub-section (1), then,—(i) the amount not so utilised shall be charged under section 45as the income of the previous year in which the period of two years from the date of the transfer of the original asset expires; and(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.