Capital Gains on Agricultural Land: 54B & 54F Guide

Quick Summary

Selling agricultural land in India can fall into one of three tax positions, and confusing them is the single most common and most costly mistake a seller makes. It can be entirely outside the capital gains net because the land qualifies as "rural agricultural land" under the specific distance-and-population test covered below — in which case none of the rest of this article's exemption provisions are even relevant, because there's no taxable gain to shelter in the first place. It can be a taxable "urban" agricultural land sale where the gain is fully sheltered by reinvesting in another agricultural land within the statutory window (the old Section 54B route). Or it can be a taxable sale — agricultural or any other long-term capital asset other than a residential house — where the gain is sheltered instead by reinvesting in a residential house (the old Section 54F route). Since 1 April 2026, both routes sit in the Income-tax Act, 2025 under new section numbers, and this guide treats getting those numbers right as seriously as it treats the substantive conditions themselves.

The Income-tax Act 2025 Renumbering

The Income-tax Act, 1961 — the statute every existing piece of capital gains commentary, every chartered accountant's working vocabulary, and two decades of case law refer to by its old section numbers — was repealed and replaced by the Income-tax Act, 2025, which came into force on 1 April 2026. The stated purpose of the new Act was simplification and consolidation — shorter, clearer sections, fewer cross-references, and, in the government's own framing, "the same tax, simpler law" rather than a substantive rewrite of tax policy. Our circle rate guide found exactly that pattern for Sections 50C and 43CA: the numbers changed (to Section 78 and Section 53 respectively), the substance did not. This article set out to confirm whether the same holds for Sections 54B and 54F.

Based on this research — a comparison table published by ClearTax mapping the full run of old-Act capital gains exemption provisions (Sections 54 through 54H) to their new-Act equivalents, cross-checked against an independent clause-by-clause comparison note (covering the corresponding Income Tax Bill, 2025 clause before the Bill's enactment) that specifically compared old Section 54B to what it called "Clause 83" — the following mapping is what multiple independent sources converge on:

What this research is more confident about, because it turns on substance rather than a specific numeral: on every source consulted, the underlying conditions of both provisions — the reinvestment windows, the required prior use test for agricultural land, and the deposit scheme for unutilised amounts — are described as carried forward without substantive change into the new Act. One source flagged a single technical difference worth noting: where old Section 54B's operative cross-reference pointed to Section 45 (the old Act's general charging section for capital gains), the new Act's equivalent provision is understood to cross-refer to its own renumbered charging section instead — a structural consequence of the whole Act being renumbered, not a substantive policy change to how the exemption itself works. Throughout the rest of this article, both the old and new section numbers are given together, exactly as our circle rate guide did for Section 50C and 78, precisely because two decades of habit mean "Section 54B" will keep appearing in conversation and in older material for years after the new numbering takes hold.

Is Your Agricultural Land Even a Capital Asset?

Before any exemption provision becomes relevant, one question has to be answered first, and it's the question most casual advice skips entirely: is the land you're selling a "capital asset" for income tax purposes at all? If it isn't, there is no capital gain to compute, no exemption to claim, and none of Sections 54B or 54F apply — not because an exemption sheltered the gain, but because the transaction was never inside the capital gains tax net to begin with.

The old Section 2(14) definition of "capital asset" — carried forward, per the mapping above, as new Section 2(20) — defines capital asset broadly as property of any kind held by an assessee, but explicitly excludes a category the law calls "rural agricultural land." Land that meets the rural test is not a capital asset, full stop, and its sale generates agricultural income (or simply a non-taxable receipt), not a capital gain. Land that fails the rural test — commonly described as "urban agricultural land" in professional shorthand, even though the more precise description is simply "agricultural land that doesn't meet the rural exclusion" — is a capital asset like any other, and its sale is taxed exactly like the sale of any other land, subject to whichever of the reinvestment exemptions covered later in this guide the seller can claim.

The Rural Land Test — Distance and Population

Agricultural land counts as "rural," and is therefore excluded from being a capital asset, only if it is not situated within either of the following two boundaries — meaning it must clear both tests to qualify as rural:

• Not within the jurisdictional limits of a municipality, municipal corporation, notified area committee, town area committee, or cantonment board that has a population of 10,000 or more, according to the last preceding census with published figures before the relevant financial year; and
• Not within a specified aerial distance from the local limits of any such municipality or cantonment board, where the distance band is set by the population of that municipality or cantonment board:

Two procedural details materially affect how this test plays out in practice, and both are worth understanding rather than treating the table above as self-executing. First, the distance is measured aerially (as the crow flies), not by road distance — a rule that has been settled since amendments effective from the 2013-14 assessment year onward, and one that can genuinely change the outcome for a parcel that sits close to a municipal boundary by straight-line distance but considerably further by any actual road route. Second, the specific distance band that applies within each population tier is not automatically the maximum shown in the table — the Central Government has the authority to notify the actual applicable distance for a given municipality within the outer limit its population tier allows, meaning the true test for a specific parcel near a specific town requires checking whether a notification actually places that parcel inside or outside the urban boundary, not simply estimating distance and population independently.

Long-Term vs Short-Term Holding Period

For land and other immovable property, the threshold between short-term and long-term capital gains is a holding period of 24 months. Land held for more than 24 months before transfer generates a long-term capital gain; land held for 24 months or less generates a short-term capital gain. This threshold applies uniformly whether the land is agricultural or non-agricultural (once it's established as a capital asset at all), and it matters directly for this article's two exemption routes, because both old Section 54B/new Section 83 and old Section 54F/new Section 86 are available only against long-term capital gains — a short-term gain on land sold within 24 months of acquisition cannot be sheltered by either reinvestment route, and is instead taxed at the seller's applicable slab rate (for an individual) regardless of what the proceeds are reinvested in.

For inherited land specifically, the holding period for this test includes the period the land was held by the previous owner (the person from whom it was inherited) — a taxpayer who inherited land their parent held for fifteen years, and sells it eight months after inheriting it, is still treated as holding a long-term capital asset, because the combined holding period, not just the period since inheritance, is what the 24-month test looks at. The cost of acquisition similarly carries over from the previous owner's original cost, not the (often notional or zero) cost to the person who inherited it.

Separately, one further consequence of the current capital gains framework is worth flagging because it affects the actual rate applied to a long-term gain, even though it isn't part of the 54B/54F exemption mechanics themselves: the Finance (No. 2) Act, 2024 removed the indexation benefit for most long-term capital gains on land and buildings for transfers on or after 23 July 2024, replacing the earlier 20%-with-indexation computation with a flat 12.5% rate without indexation, carried forward into the current framework under the Income-tax Act, 2025. This changes how large the taxable gain is calculated to be in the first place — which is exactly why claiming a 54B/83 or 54F/86 exemption to shelter that gain, where the reinvestment conditions can genuinely be met, is worth more in absolute tax saved today than it was under the older indexed-cost regime for many sellers.

Section 54B / New Section 83 — Reinvesting in Agricultural Land

Where the land sold is a taxable ("urban") agricultural capital asset generating a long-term (or, notably, this specific provision also covers a short-term gain, unlike Section 54F — see below) capital gain, the exemption under old Section 54B, now Section 83, shelters that gain when the proceeds are reinvested in another parcel of agricultural land, subject to conditions that this research found described as unchanged in substance across the recodification:

• Who can claim it: An individual, or a Hindu Undivided Family (HUF) — this exemption is not available to a company or other entity form.
• Prior use requirement: The land sold must have been used for agricultural purposes by the taxpayer, or a parent of the taxpayer (in the individual's case), or by the HUF, for at least 2 years immediately preceding the date of transfer. This is a genuinely important condition that trips up sellers of land that was agricultural in classification but had, in practice, gone unused or been left fallow for an extended period before the sale — the exemption requires genuine prior agricultural use, not merely the land's revenue classification.
• Note on holding period for this provision specifically: unlike Section 54F below, old Section 54B's exemption is available against both long-term and short-term capital gains on the agricultural land sold, provided the 2-year prior agricultural use condition is independently satisfied — the prior-use test and the gain's own long/short-term character are two separate things.
• Reinvestment window: The taxpayer must purchase another parcel of agricultural land within 2 years from the date of transfer of the original land. There is no requirement that the replacement land be in the same state, district, or even in a rural area rather than an urban one — the replacement parcel simply has to be agricultural land.
• Extent of exemption: The exemption is available up to the amount of the capital gain that is actually invested in the new agricultural land; if the cost of the new land is less than the capital gain, the shortfall remains taxable, and if it's equal to or more than the gain, the entire gain is exempt.
• Lock-in on the replacement land: If the newly purchased agricultural land is itself sold within 3 years of its purchase, the exemption originally claimed is effectively clawed back — the cost of the new asset, for the purpose of computing the gain on that subsequent sale, is reduced by the amount of the exemption claimed earlier, which increases the taxable gain on that second sale correspondingly.

Section 54F / New Section 86 — Reinvesting in a Residential House

Where old Section 54B/new Section 83 shelters a gain by reinvesting in more agricultural land, old Section 54F, now new Section 86, takes the opposite direction: it shelters a long-term capital gain on the sale of any capital asset other than a residential house — which includes agricultural land that failed the rural test, as well as non-agricultural land, a commercial property, listed shares, or any other long-term capital asset — when the proceeds are reinvested in a residential house. For a seller of urban agricultural land, Section 54F/86 and Section 54B/83 are therefore genuinely alternative routes to the same broad goal (sheltering the gain), and the right one to choose depends entirely on what the seller actually intends to do with the money — buy more farmland, or buy a house.

• Who can claim it: An individual or an HUF, as with Section 54B/83.
• Applies only to long-term gains. Unlike Section 54B/83, Section 54F/86 does not extend to a short-term capital gain — the asset sold must have been held for more than 24 months.
• The "no other house" condition. This is the condition that most often disqualifies an otherwise well-intentioned claim: on the date of transfer, the taxpayer must not own more than one other residential house (excluding the new one being purchased for the exemption), and must not purchase another residential house (other than the new one) within 2 years, or construct another within 3 years, of the original transfer. A taxpayer who already owns two or more houses at the time of the original sale cannot claim this exemption at all, regardless of the reinvestment itself.
• Reinvestment window: The new residential house must be purchased within 1 year before, or 2 years after, the date of transfer of the original asset — or, if constructed rather than purchased, within 3 years of the transfer.
• Proportional exemption, not automatic full exemption. Unlike Section 54B/83's exemption (which is capped simply at the amount reinvested against the gain), Section 54F/86's exemption is computed proportionally against the full net sale consideration, not just the gain: if the entire net sale consideration is reinvested in the new residential house, the entire capital gain is exempt; if only a portion of the sale consideration is reinvested, only that proportion of the capital gain is exempt, computed as (cost of new residential house ÷ net sale consideration) × capital gain.
• The ₹10 crore cap. The Finance Act, 2023 introduced a ceiling: for the purpose of computing this exemption (and the equivalent Section 54 exemption on sale of a residential house itself), the cost of the new residential house is capped at ₹10 crore — an investment in a house costing more than that does not increase the exemption beyond what a ₹10 crore investment would have sheltered. This cap is specifically relevant to the HNI seller profile this article is written for, where a large agricultural land sale reinvested into a single high-value residential property could otherwise have sheltered the entire gain without limit.

The Capital Gains Account Scheme — Deposit for Unutilised Amounts

Both exemption routes assume the taxpayer actually completes the qualifying reinvestment by the time they file their tax return for the year of sale — but real transactions don't always move that fast, and the law accounts for that. If the capital gain (or, for Section 54F/86, the relevant portion of the net sale consideration) has not yet been reinvested in agricultural land or a residential house by the due date for filing that year's income tax return, the taxpayer can deposit the unutilised amount in a Capital Gains Account Scheme (CGAS) account with an authorised bank, and still claim the exemption for that year, provided the deposit is made before the return filing due date.

The deposited amount must then actually be used for the qualifying purchase or construction within the same overall time limits described above (2 years for agricultural land or a purchased residential house, 3 years for a constructed residential house), measured from the original date of transfer, not from the date of the CGAS deposit. If the full amount deposited isn't utilised within that window, the unutilised balance is brought to tax as a long-term capital gain of the year in which the relevant time limit expires — a taxpayer cannot simply leave money in a CGAS account indefinitely and treat the exemption as permanently secured. This deposit-scheme mechanism itself is described across the sources this research consulted as substantively unchanged by the Income-tax Act, 2025's recodification — restructured in section number and internal cross-references along with everything else, but not altered in what it actually requires of a taxpayer.

How This Interacts With TDS

It's worth being clear that the exemption mechanics in this article and the TDS withheld at the time of sale are two separate steps that happen at different points in the transaction, and confusing them causes real confusion for sellers expecting one to automatically account for the other. For a resident seller, a buyer withholds TDS under Section 194-IA (now renumbered as Section 393(1) under the Income-tax Act, 2025, per current research) on transfers of property worth ₹50 lakh or more, generally at a flat 1% of the transaction value — a rate set without any reference to whether the seller intends to claim a 54B/83 or 54F/86 exemption. For an NRI seller, the equivalent provision is Section 195 (now Section 393(2)), at a considerably higher rate reflecting the actual capital gains computation, covered in full in our companion article on selling land in India as an NRI.

In both cases, a seller who is confident they will fully qualify for a 54B/83 or 54F/86 exemption — because the reinvestment is already planned, or in progress — can apply in advance for a lower or nil TDS deduction certificate under Section 197 (Form 13), so the TDS withheld at the point of sale reflects the actual, post-exemption tax position rather than a default computation that ignores the exemption entirely and has to be recovered later as a refund. This is the same certificate mechanism our NRI-selling guide covers in more depth for the NRI-specific case; the principle applies to a resident seller with a genuine 54B/54F claim too, though the far smaller 1% resident TDS rate under Section 194-IA/393(1) makes the stakes of over-withholding considerably lower for a resident than for an NRI.

Worked Examples

Common Mistakes

• Assuming all agricultural land is automatically tax-free on sale. Only land that clears the specific rural distance-and-population test is outside the capital gains net — a large share of corridor land near expanding towns fails this test and is fully taxable.
• Estimating the rural/urban distinction by eye rather than checking the actual notified population and aerial distance. The test is a precise, checkable fact, not a rule of thumb, and it's exactly the kind of thing worth confirming with a chartered accountant against current census and notification data.
• Assuming Section 54B applies to reinvestment in anything other than agricultural land. Reinvesting agricultural land sale proceeds into a house requires the separate Section 54F/86 route, with its own, different conditions (including the "no other house" restriction Section 54B/83 doesn't carry).
• Overlooking the "no other house" disqualification under Section 54F/86 until after the sale. This is a binary eligibility gate, not something that reduces the exemption gradually — confirm it before planning a sale around this route.
• Not assembling prior-use evidence for a Section 54B/83 claim. The 2-year genuine agricultural use requirement is where this exemption is most often disputed; revenue records and cultivation evidence should be gathered proactively.
• Citing old section numbers as though the recodification changed nothing to check. The substantive conditions appear unchanged on current research, but the section numbers themselves (54B→83, 54F→86, and the rest) should be verified against the primary Act text before use in any actual filing or client communication — see the prominent flag earlier in this article.
• Forgetting the Capital Gains Account Scheme deadline. The deposit must be made before the tax return filing due date for the year of sale, not simply before the reinvestment window itself closes.

How Farmland India Helps

Every location page on Farmland India discloses the land's classification and the applicable circle rate for that specific parcel — the two facts a seller's chartered accountant needs first to even determine whether a sale falls inside or outside the capital gains net covered in this guide. For a seller weighing a Section 54B/83 reinvestment into a new agricultural parcel specifically, having a verified classification and Trust Score-checked title on the replacement land removes one layer of diligence from what is already a tax-sensitive, time-boxed transaction.

Frequently Asked Questions