When does agri land sale qualify for tax exemption?

Since agricultural land is a non-residential asset, can sale proceeds from it be reinvested in a house to claim a deduction under Sec 54F? Or does it qualify for Sec 54 exemption? I have inherited land from my father and I am the second generation to inherit it; so, the original purchase date must be around 40-50 years ago.

—Name withheld on request

We understand that you have inherited agricultural land, of which the original purchase date is 40-50 years old. For determining taxability on its sale as capital gains and related deductions, it should first be examined whether the said agricultural land qualifies as a capital asset.

As per the Income-tax Act, 1961(‘the old Act’)/ the Income-tax Act, 2025 (‘the new Act’), agricultural land in India does not qualify as a capital asset, except where:

Accordingly, only where an agricultural land qualifies as a capital asset based on above, sale of the same shall give rise to taxable capital gains.

Assuming it qualifies as capital asset, as the total holding period of the land (including of previous owners) is 40-50 years, it shall qualify to be a long-term capital asset and gains on the same shall be considered long-term (LTCG).

The deduction under Section 54 of the old Act (Section 82 of the new Act), is available towards LTCG arising on sale of a residential house. Accordingly, the sale of agricultural land shall not be eligible for deduction under this section.

The deduction under Section 54F of the old Act (Section 86 of the new Act) is available towards LTCG arising on sale of any long-term capital asset (except residential house). Accordingly, in the instant case, deduction under this section can be examined, if the net consideration is invested in a residential house in India within the specified timelines and all other specified conditions are satisfied,

It may be noted that, there is also a deduction prescribed under Section 54B of the old Act (Section 83 of the new Act), towards LTCG arising on sale of any land which was used by assessee/ his parent for agricultural purposes. if another land was purchased for being used for agricultural purposes, subject to satisfaction of other specified timelines and conditions, which may be examined if applicable.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.