Capital Gains Tax Relief for Agricultural Land: Clause 83 of the Income Tax Bill, 2025 vs. Section 54B of the Income Tax Act, 1961

Clause 83 Capital gains on transfer of land used for agricultural purposes not to be charged in certain cases.

Income Tax Bill, 2025

Introduction

Clause 83 of the Income Tax Bill, 2025, and Section 54B of the Income Tax Act, 1961, both address the taxation of capital gains arising from the transfer of agricultural land. These provisions aim to provide tax relief to individuals and Hindu Undivided Families (HUFs) who reinvest the proceeds from the sale of agricultural land into purchasing new agricultural land. Understanding these provisions is crucial for taxpayers involved in agricultural activities, as they offer significant tax benefits under specific conditions.

Objective and Purpose

The primary objective of both Clause 83 and Section 54B is to encourage the continuation of agricultural activities by providing tax exemptions on capital gains, provided the gains are reinvested in new agricultural land. This legislative intent aligns with broader policy goals of supporting agriculture, ensuring food security, and promoting sustainable land use. By offering tax incentives, these provisions seek to discourage the diversion of agricultural land for non-agricultural purposes and to maintain the agricultural character of landholdings.

Detailed Analysis

Clause 83 of the Income Tax Bill, 2025

Clause 83 introduces a framework where capital gains from the transfer of agricultural land are not immediately taxed if the proceeds are reinvested in new agricultural land within a specified period.

The key provisions include:

1. Eligibility Criteria:

The clause applies to individuals and HUFs who transfer agricultural land used by themselves or their parents for agricultural purposes in the two years preceding the transfer.

2. Reinvestment Requirement:

The taxpayer must purchase new agricultural land within two years of the transfer to qualify for the tax exemption.

3. Tax Treatment:

- If the capital gains exceed the cost of the new land, the excess is taxed u/s 67, and the cost of the new asset is considered nil for future capital gains if sold within three years.

- If the capital gains are equal to or less than the cost of the new land, no tax is charged, but the cost of the new asset is reduced by the amount of the capital gains for future sales within three years.

4. Unutilized Gains:

If the gains are not utilized before filing the tax return, they must be deposited in a specified bank account and used according to a government-notified scheme.

5. Consequences of Non-utilization:

Unutilized amounts after two years are taxed, and the taxpayer can withdraw the unused funds as per the scheme.

Section 54B of the Income Tax Act, 1961

Section 54B provides a similar framework for tax exemption on capital gains from the transfer of agricultural land.

Key aspects include:

1. Eligibility Criteria:

Applies to individuals and HUFs who have used the land for agricultural purposes in the two years before the transfer.

2. Reinvestment Requirement:

New agricultural land must be purchased within two years to avail of the exemption.

3. Tax Treatment:

- If the capital gains exceed the cost of the new land, the difference is taxed u/s 45, with the new asset's cost considered nil for future gains if sold within three years.

- If the capital gains are equal to or less than the cost of the new land, no tax is charged, and the cost of the new asset is reduced by the capital gains for future sales within three years.

4. Unutilized Gains:

Unutilized gains must be deposited in a specified account before filing the income tax return, with proof of deposit required.

5. Consequences of Non-utilization:

Unused amounts are taxed as income after two years, and the taxpayer can withdraw the funds according to the scheme.

Comparative Analysis

Both Clause 83 and Section 54B share a common goal of promoting agricultural land use by offering tax exemptions on capital gains. However, there are subtle differences in their implementation:

1. Tax Sections Referenced:

Clause 83 refers to Section 67 for taxing excess gains, while Section 54B uses Section 45. This indicates a potential restructuring or renumbering of tax sections in the new bill.

2. Filing References:

Clause 83 refers to Section 263 for filing returns, whereas Section 54B uses Section 139. This change might reflect updates in filing procedures or sections under the 2025 Bill.

3. Terminology and Structure:

While the core provisions remain similar, Clause 83 introduces a more structured approach to handling unutilized gains through specified bank deposits and government schemes.

4. Practical Implications:

The provisions significantly impact taxpayers engaged in agricultural activities. They must carefully plan the timing of land sales and purchases to maximize tax benefits. Compliance with deposit requirements and scheme notifications is crucial to avoid unintended tax liabilities.

Conclusion

Clause 83 of the Income Tax Bill, 2025, and Section 54B of the Income Tax Act, 1961, both serve as crucial mechanisms for supporting agricultural activities through tax incentives. By offering exemptions on capital gains reinvested in agricultural land, these provisions align with broader policy objectives of sustaining agriculture and promoting land conservation. As tax laws evolve, it is essential for stakeholders to stay informed about changes and ensure compliance to benefit from available tax reliefs. Future reforms might focus on clarifying procedural aspects or expanding the scope of eligible investments to further support agricultural development.

 

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Full Text:

Clause 83 Capital gains on transfer of land used for agricultural purposes not to be charged in certain cases.

 

Dated: 25-3-2025