Income Tax 2025

Appearance

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

83(1) ​

Where an assessee, being an individual or a Hindu undivided family,––

  • (a) has capital gains arising from the transfer of a capital asset, being land, which was used by the assessee or his parent, or the Hindu undivided family for agricultural purposes (original asset), in two years immediately preceding the date of transfer; and
  • (b) has, within two years after that date, purchased any other land for being used for agricultural purposes (new asset), then, instead of the capital gains being charged to income-tax as income of the tax year in which the transfer took place, it shall be dealt with as follows:— (i) if the capital gains exceed the cost of the new asset, such excess shall be charged under section 67, and for computing any capital gains arising from the transfer of the new asset within three years of its purchase, the cost shall be nil; or (ii) if the capital gains is equal to or less than the cost of the new asset, no capital gains shall be charged under section 67, and for computing any capital gains arising from the transfer of the new asset within three years of its purchase, the cost shall be reduced by the amount of the capital gains.

83(2) ​

If the capital gains is not utilised by the assessee to purchase the new asset before filing the return of income under section 263, then––

  • (a) the unutilised amount shall be deposited in a specified bank or institution and utilised as per the scheme notified by the Central Government;
  • (b) such deposit shall be made not later than the due date applicable in the case of the assessee for filing the return of income under section 263(1); and
  • (c) the proof of deposit shall be submitted along with the return on or before the due date of filing of the return.

83(3) ​

For the purposes of sub-section (1), the amount already utilised for purchasing the new asset together with the deposited amount under sub-section (2), shall be deemed to be the cost of the new asset.

83(4) ​

If the amount deposited under sub-section (2) is not fully utilised for purchase of the new asset within the period specified in sub-section (1), then,—

  • (a) the unutilised amount shall be charged under section 67 as the income of the tax year in which two years from the date of the transfer of the original asset expires; and
  • (b) the assessee shall be entitled to withdraw the unused amount according to the scheme referred to in sub-section (2).
Explanation

Section Summary: ​

Section 83 provides relief from capital gains tax for individuals or Hindu Undivided Families (HUFs) who sell agricultural land and reinvest the proceeds in another agricultural land within a specified timeframe. The purpose is to encourage the continuation of agricultural activities by allowing taxpayers to defer or avoid capital gains tax if they reinvest the sale proceeds in another agricultural property.

Key Changes: ​

  1. Applicability: This section specifically applies to individuals and HUFs, not to other entities like companies or firms.
  2. Reinvestment Requirement: The taxpayer must purchase new agricultural land within two years of selling the original agricultural land to qualify for the tax relief.
  3. Deposit Mechanism: If the taxpayer cannot reinvest the entire capital gains amount before filing the income tax return, they must deposit the unutilized amount in a specified bank or institution as per government guidelines.
  4. Tax Treatment:
    • If the capital gains exceed the cost of the new asset, the excess is taxed.
    • If the capital gains are equal to or less than the cost of the new asset, no tax is charged, but the cost base of the new asset is adjusted for future capital gains calculations.

Practical Implications: ​

  1. Tax Deferral: Taxpayers can defer capital gains tax by reinvesting in agricultural land, reducing their immediate tax liability.
  2. Compliance Burden: Taxpayers must ensure timely reinvestment or deposit of the capital gains amount to avoid penalties or taxation of unutilized amounts.
  3. Impact on Future Sales: If the new agricultural land is sold within three years of purchase, the cost base for calculating capital gains is adjusted based on the reinvested amount, potentially increasing future tax liability.

Critical Concepts: ​

  1. Original Asset: The agricultural land sold, which was used for agricultural purposes in the two years preceding the sale.
  2. New Asset: The agricultural land purchased within two years of selling the original asset.
  3. Cost Base Adjustment:
    • If the capital gains exceed the cost of the new asset, the excess is taxed, and the cost base of the new asset is considered nil for future sales within three years.
    • If the capital gains are equal to or less than the cost of the new asset, the cost base is reduced by the amount of capital gains for future sales within three years.
  4. Specified Bank/Institution: A government-notified bank or institution where unutilized capital gains must be deposited if not reinvested before filing the tax return.

Compliance Steps: ​

  1. Reinvestment: Purchase new agricultural land within two years of selling the original land.
  2. Deposit Unutilized Amount: If the entire capital gains amount is not reinvested before filing the tax return, deposit the unutilized amount in a specified bank or institution.
  3. Documentation: Submit proof of reinvestment or deposit along with the income tax return.
  4. Utilization of Deposited Amount: Ensure the deposited amount is used to purchase agricultural land within the specified period (two years from the date of sale of the original asset).

Examples: ​

  1. Scenario 1: Mr. A sells agricultural land for ₹50 lakh (capital gains of ₹30 lakh) and buys new agricultural land for ₹40 lakh within two years. Since the capital gains (₹30 lakh) are less than the cost of the new asset (₹40 lakh), no tax is charged. However, the cost base of the new asset is reduced to ₹10 lakh (₹40 lakh - ₹30 lakh) for future capital gains calculations if sold within three years.

  2. Scenario 2: Ms. B sells agricultural land for ₹80 lakh (capital gains of ₹50 lakh) and buys new agricultural land for ₹40 lakh within two years. The excess capital gains (₹10 lakh) are taxed, and the cost base of the new asset is considered nil for future sales within three years.

  3. Scenario 3: Mr. C sells agricultural land for ₹60 lakh (capital gains of ₹40 lakh) but only reinvests ₹30 lakh in new agricultural land. He deposits the remaining ₹10 lakh in a specified bank. If he fails to utilize the deposited amount within two years, the ₹10 lakh will be taxed as income, and he can withdraw the unused amount.