Section 83: capital gains on transfer of land used for agricultural purposes not to be charged in certain cases

Introduction

An individual or HUF selling eligible agricultural land can defer capital gains by purchasing replacement agricultural land within two years. Prior agricultural use and later use of unspent gains under the deposit scheme are central to the claim.

Key takeaways

Who qualifies and the basic mechanism

Section 83(1) applies where an individual or HUF has capital gains from transferring land (the "original asset") that was used for agricultural purposes by the assessee, the assessee's parent, or the HUF, in the two years immediately preceding the transfer, and the assessee purchases other agricultural land (the "new asset") within two years after the transfer. In that case:

• If the capital gains exceed the cost of the new asset, the excess is taxed under Section 67, and the cost of the new asset is treated as nil for computing gains if it is sold within three years of purchase.
• If the capital gains are equal to or less than the cost of the new asset, no capital gains are taxed, and the cost of the new asset is reduced by the amount of the capital gains for computing gains if it is sold within three years of purchase.

The deposit scheme for unutilised gains

If the capital gains are not utilised to purchase the new land before the assessee files the return of income under Section 263, Section 83(2) requires the unutilised amount to be deposited in a specified bank/institution under the Central Government's notified scheme, before the return-filing due date under Section 263(1), with proof of deposit submitted along with the return.

Section 83(3) treats the amount already utilised for the new land, plus the deposited amount, as the cost of the new asset.

If the deposited amount is not fully utilised for purchase of the new land within the two-year period in Section 83(1), Section 83(4) taxes the unutilised balance under Section 67 as income of the year in which those two years from the original transfer expire, and the assessee can withdraw the unutilised amount as per the deposit scheme.

Evidence of agricultural use

The original land must have been used for agriculture by the assessee, a parent or the HUF during the two years immediately before transfer. Keep cultivation and land-use records for that period.

Step-by-step flow for applying Section 83

1. 1

   Is the assessee an individual or HUF with capital gains from transfer of land?

   • No: Section 83 does not apply.
   • Yes: Go to the next step.
2. 2

   Was the land used for agricultural purposes by the assessee, a parent or the HUF in the two years immediately before transfer?

   • No: Section 83 does not apply.
   • Yes: Go to the next step.
3. 3

   Was other land purchased for agricultural use within two years after the transfer?

   If not purchased before filing the return, deposit the unutilised amount in the notified scheme by the due date under Section 263(1) and attach proof.

4. 4

   Compare the capital gain with the cost of the new land

   • Gain exceeds cost: Excess charged under Section 67; cost of new land is nil if sold within three years.
   • Gain equal to or less than cost: Nothing charged; cost of new land is reduced by the gain if sold within three years.

Practical checklist

Glossary

Original asset

The transferred land used for agriculture during the prescribed preceding period.

New asset

Replacement land purchased for agricultural use within two years.

Frequently asked questions