Tax Query: Does reinvestment in agricultural land qualify for an exemption?

Can I avail an income tax exemption by investing my long-term capital gains in agricultural land? I have earned long-term capital gains from the sale of my residential house property. 

You can avail an exemption on the LTCG tax earned from the sale of a residential house property if you invest your capital gains in the following assets subject to the prescribed conditions and timelines: 

1. New residential house in India: If you invest the LTCG in a new residential house in India, you can claim an exemption under section 54 of the Income Tax Act. The investment for the purchase of the new property should be made before one year of the sale or within two years after the sale of a long-term capital asset. The exemption amount will be lower for a long-term capital gain earned or cost of the new asset.
2. Specified notified bonds: You can invest in NHAI bonds or REC bonds, redeemable after five years, within six months from the transfer of the house property and claim an exemption under section 54EC of the Income Tax Act. The amount of investment should not exceed Rs 50 lakh during the current FY and the succeeding FY. 
3. Equity shares of an eligible start-up: You can invest the LTCG earned in the equity shares of an eligible start-up and claim an exemption under section 54GB of the Income Tax Act. The exemption amount will be lower of a long-term capital gain earned or cost of the new asset, provided that the eligible company uses the amount to purchase new plant and machinery within a period of one year.

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However, there is no provision in the Income Tax Act that provides for a long-term capital gains tax exemption for reinvestment in an agricultural land when the capital asset transferred is a residential house property. Therefore, the same investment is not eligible for exemption and you will have to pay capital gains tax as per the income tax provisions.

For any clarifications/feedback on the topic, please contact the writer at komal.chawla@cleartax.in

Komal Chawla

I am an aspiring Chartered Accountant. I spend most of my free time dredging through the various Indian finance subreddits. I am a semi-professional bowler with a high strike rate every time there is a new tax reform!