Is there a way to avoid tax on the sale of inherited agricultural land using the Income-tax Act Section 54? That was the query posed by an individual who, along with his two sisters, inherited agricultural land from his father. He said that they want to sell the land and distribute the proceeds among the three of them.
Assuming the agricultural land is urban agricultural land located within the specified limits of a municipality or cantonment board, depending on its population, Mahesh Nayak, chartered accountant with CNK & Associates, said that capital gains from its sale would not be taxable.
The CA also assumed that the father acquired the land at least two years before the intended sale and that all three siblings are tax residents of India.
Exemption under Section 54F
Mahesh Nayak noted that since the property is agricultural land, each of the three siblings may be able to claim an exemption under (Section 86 of the , 2025) to the extent the sale proceeds are reinvested in a residential house property.
Alternatively, he said, an exemption may be available under Section 54B (Section 83 of the 2025 Act) if the proceeds are used to purchase another agricultural land, assuming the inherited land was being cultivated by the father.
“The three of you do not have to jointly reinvest the proceeds in a single residential property or parcel of ,” Nayak said. “Each of you can invest separately. However, for Section 54F, each person can claim the exemption for only one residential property.”
The exemption under Section 86 is available provided that the siblings do not own more than one residential property, other than the new property, on the date of transfer of the agricultural land.
“If you purchase a residential property, the investment must be made within one year before or two years after the sale of the land,” Nayak said. “If you construct a residential property, construction must be completed within three years of the sale. The amount eligible for exemption is capped at ₹10 crore.”
Nayak said that for Section 54B, the investment in agricultural land must be made within two years of the sale of the inherited land. The newly acquired agricultural land must then be held for at least three years from the date of purchase.
“You may also claim an exemption under Section 54EC (Section 85 of the Income Tax Act, 2025) by investing the capital gains in specified capital gains bonds. This exemption, however, is capped at ₹50 lakh,” he said in response to the individual query.
If any capital gain remains taxable, Nayak said, the individual can choose to pay tax at 12.5%, plus applicable surcharge and education cess, on the gain computed without indexation, or at 20%, plus applicable surcharge and education cess, on the gain computed after applying indexation to the cost of acquisition.
For indexation purposes, he said, the period for which the father held the land will also be taken into account. Similarly, the cost of acquisition will generally be the amount your father paid for the land. If the land was acquired before 1 April 2001, you can instead use its fair market value as on 1 April 2001, subject to the applicable rules.