Tag: Section 83

Section 85 (Earlier 54EC) Capital Gain Bonds, and Sections 83 and 84 (Earlier 54B and 54D) (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 03 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 85 (earlier 54EC) exempts the long-term gain on land or building if the gain is invested within six months in NHAI or REC bonds redeemable after five years, up to ₹50 lakh.
  • The bonds must not be sold, converted into money or pledged for a loan within five years, or the exempted gain is taxed in that year (section 85(3) and (4)).
  • Section 83 (earlier 54B) exempts the gain on agricultural land if you buy other agricultural land within two years; section 84 (earlier 54D) exempts gain on compulsory acquisition of industrial land or building if you buy or build a replacement within three years.
  • Gains not used by the return due date go to the capital gains deposit scheme, except for section 85, where the investment must be within six months.

If you sell land or a building, investing the long-term gain in specified bonds can save tax on it. Two other sections give similar relief for agricultural land and for land taken by the government. This post covers sections 83 to 85 of the Income-tax Act, 2025.

Section 85 (earlier 54EC): investment in specified bonds

Original asset: land or building, or both, with a long-term capital gain. Gain on shares, gold or other assets does not qualify.

Who: any assessee, not only individuals.

Investment: all or part of the capital gain, within six months after the date of transfer, in a long-term specified asset: a bond redeemable after five years, issued on or after 1 April 2018 by the National Highways Authority of India or Rural Electrification Corporation Limited, or another bond notified by the Central Government.

Limit (section 85(2)): the investment from the gain on one or more original assets cannot exceed ₹50 lakh, either in a tax year, or in the year of the transfer and the next tax year taken together.

Exemption (section 85(1)):

  • If the gain is more than the investment, the excess is taxed under section 67.
  • If the gain is equal to or less than the investment, the whole gain is exempt.

Lock-in (section 85(3) and (4)): if you transfer the bonds, or convert them into money, within five years of acquiring them, the exempted gain is treated as long-term capital gain of that year. Taking a loan or advance on the security of the bonds is treated as converting them into money on that date.

No double benefit (section 85(5)): if you use the investment for this exemption, you cannot also claim a section 123 deduction for it.

Example. A plot held for six years is sold on 20/08/2026 for a long-term gain of ₹60,00,000. Within six months, by 19/02/2027, you invest ₹50,00,000 in NHAI bonds. Exempt: ₹50,00,000. Taxed: ₹10,00,000 at 12.5%, i.e. ₹1,25,000 plus cess. If you also sell another plot in the same year, the ₹50 lakh limit is shared.

Points to watch:

  • The six months run from the date of transfer, not the end of the year, and there is no deposit scheme alternative for this section. The bond must be bought in time, even if the return is not yet due.
  • If the sale price for a compulsory acquisition is not received on the date of transfer, the period for investment is counted from the date the compensation is received (section 89).
  • Interest on the bonds is taxable; the exemption is only for the capital gain.
  • The investment limit is for the gain from land or building, not the sale price. Invest no more than the gain.

Section 83 (earlier 54B): agricultural land

Who: an individual or HUF.

Original asset: land used for agricultural purposes by the assessee, his parent or the HUF in the two years immediately before the transfer. (The land must be a capital asset: urban land, as explained in our post on property sales.)

New asset: other land bought within two years after the transfer, for use for agriculture.

  • If the gain exceeds the cost of the new land, the excess is taxed, and the cost of the new land is nil if it is sold within three years of purchase.
  • If the gain is less than or equal to the cost, nothing is taxed, and the cost of the new land is reduced by the gain if it is sold within three years.

Deposit: if the gain is not used by the date of filing the return, deposit it in a specified bank under the capital gains deposit scheme before the due date and attach proof (section 83(2)). Any unused amount is taxed as income of the year in which two years from the transfer expire (section 83(4)).

Section 84 (earlier 54D): compulsory acquisition of an industrial undertaking’s land or building

Original asset: land, building or a right in them, belonging to an industrial undertaking and used by the assessee for its business in the two years before the transfer, compulsorily acquired under any law.

New asset: other land, building or a right, bought within three years after the transfer, or a building constructed in that period, for shifting or re-establishing the undertaking or setting up another industrial undertaking.

The same two-way rule applies: the gain above the cost of the new asset is taxed, and the cost of the new asset is nil or reduced if it is transferred within three years. The unused gain goes into the capital gains deposit scheme before the return due date, and any amount not used within three years of the transfer is taxed in the year those three years expire (section 84(4)).

Which section for which gain

Asset sold Residential house Land or building (not a house) Agricultural land Shares and other assets
Reinvest in a house Section 82 Section 86 Section 86 Section 86
Reinvest in NHAI or REC bonds Section 85 Section 85 Section 85 Not available
Reinvest in agricultural land Not available Not available Section 83 Not available

Our post on sections 82 and 86 explains the house exemptions, and the post on capital gains on property compares them with the bond route.

Before you invest

  1. Count six months from the date of transfer, and invest earlier than that if you want a margin.
  2. Keep the bond certificate and the allotment letter, and a note of the five-year date.
  3. Do not borrow against the bonds.
  4. Report the bonds and exemption in the capital gains schedule of the return.

Frequently asked questions

Who can claim the section 85 (earlier 54EC) exemption?

Anyone, including a company, with a long-term capital gain from the transfer of land or building or both who invests the gain, or part of it, within six months after the transfer in a long-term specified asset. Only gain on land or building qualifies.

What is a long-term specified asset?

A bond redeemable after five years issued on or after 1 April 2018 by the National Highways Authority of India or by Rural Electrification Corporation Limited, or any other bond notified by the Central Government (section 85(6)).

How much can I invest?

Not more than ₹50 lakh from the gain on one or more original assets in a tax year, or in the year of transfer and the next tax year together (section 85(2)).

How long must I hold the bonds?

Five years. If you transfer them, convert them into money or take a loan or advance against them within five years, the exempted gain is taxed as long-term gain in that year (section 85(3) and (4)).

Can I also claim section 123 on the same investment?

No. If the investment is used for section 85, no deduction under section 123 is allowed for it (section 85(5)).

When does section 83 apply?

When an individual or HUF sells agricultural land that was used for agriculture by the assessee, his parent or the HUF in the two preceding years, and buys other agricultural land within two years.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Agricultural Income: Exemption, Partial Integration and Tax Calculation

Posted on by CA Meet Dhrangadhariya

Last updated: 07 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Agricultural income from land in India is not included in total income (Schedule II of the Income-tax Act, 2025, earlier section 10(1)).
  • It covers rent from agricultural land, income from farming and processing the produce to make it fit for market, income from farm buildings, and nursery income.
  • Tea, coffee and rubber income is split by Rule 271 of the Income-tax Rules, 2026, with 35% to 40% taxable as business income.
  • If net agricultural income exceeds ₹5,000 and other income is above the basic exemption limit, the exempt income raises the tax rate on the rest (partial integration).

Farm income is one of the oldest tax exemptions in India, because the Centre taxes income under Entry 82 of the Union List, which does not cover agriculture. From Tax Year 2026-27 the exemption is serial number 1 of Schedule II of the Income-tax Act, 2025 (it was section 10(1) of the 1961 Act), and the definition is in section 2(5).

What is agricultural income?

The Act defines it as:

  1. Rent or revenue from land situated in India and used for agricultural purposes.
  2. Income derived from such land by agriculture, by the process a cultivator or receiver of rent-in-kind ordinarily uses to make the produce fit to be taken to market (for example drying, cleaning, grading), or by selling that produce when nothing more than such a process has been done.
  3. Income from a farm building owned and occupied by the receiver of rent or revenue, or occupied by the cultivator, where the building is on or near the land and is needed as a dwelling house, store-house or other out-building because of the connection with the land. The land must be assessed to land revenue or a local rate, or, if it is not, it must not lie in a municipal or cantonment area above the population limits and distances in the definition of capital asset.
  4. Income from saplings or seedlings grown in a nursery.

The definition does not include income from a farm building or land that is used for something other than agriculture, including letting it for residential or business use. It also excludes income from transferring land that falls within the municipal limits and distance bands mentioned above.

What is not agricultural income?

The income has to come from land through agriculture, so these are taxed under other heads:

  • dairy farming, poultry, fisheries and bee-keeping,
  • income from timber or forest trees of spontaneous growth,
  • income from agricultural land held as stock-in-trade,
  • income from butter, cheese or similar factory processing separate from the farm,
  • dividends and remuneration that are merely calculated by reference to agricultural profits, and
  • agricultural income from land outside India, which is taxable for a resident.

Tea, coffee and rubber

Where the grower also processes the crop, part of the income is treated as business income. Under Rule 271 of the Income-tax Rules, 2026 (earlier Rules 7, 7A, 7B and 8), the share of income that is liable to tax is:

Income from Taxable as business income Agricultural (exempt)
Sale of tea grown and manufactured by the seller in India 40% 60%
Sale of coffee grown and cured by the seller in India 25% 75%
Sale of coffee grown, cured, roasted and ground by the seller in India, with or without chicory or flavouring 40% 60%
Sale of centrifuged latex, cenex, latex based crepes, brown crepes or technically specified block rubbers made from field latex or coagulum from rubber plants grown by the seller in India 35% 65%

An allowance is made for the cost of replanting dead or useless plants or bushes in an area already planted.

Partial integration of agricultural income

Agricultural income is exempt, but a person with substantial farm income and other income is not allowed to benefit from low slab rates twice. The method is laid down each year by the Finance Act. Section 3(2) of the Finance Act, 2026 applies it to Tax Year 2026-27, in both regimes, to an individual, HUF, AOP, BOI or artificial juridical person when:

  • net agricultural income is more than ₹5,000, and
  • non-agricultural income is more than the basic exemption limit.

The basic exemption limit is ₹4,00,000 for a person taxed under section 202 (the new regime). In the old regime it is ₹2,50,000 below age 60, ₹3,00,000 for resident seniors (60 to 80) and ₹5,00,000 for resident super seniors (80 and above).

Steps:

  1. Work out tax on non-agricultural income plus net agricultural income, at the slab rates.
  2. Work out tax on the basic exemption limit plus net agricultural income.
  3. Tax on total income is (1) minus (2), then rebate, surcharge and cess as applicable.

Example (old regime, individual below 60)

Non-agricultural income is ₹7,00,000 and net agricultural income is ₹2,00,000.

Step Amount in ₹
Tax on ₹9,00,000 (7,00,000 plus 2,00,000) 92,500
Tax on ₹4,50,000 (2,50,000 exemption limit plus 2,00,000) 10,000
Tax on total income (92,500 minus 10,000) 82,500
Cess at 4% 3,300
Total tax 85,800

Companies, firms, LLPs, co-operative societies and local authorities are outside this method.

Selling agricultural land

  • Rural agricultural land (not in the municipal and distance bands) is not a capital asset, so its sale gives no capital gain.
  • Land within those bands is a capital asset, and the gain is taxable and is not agricultural income. The bands are land inside a municipality or cantonment board area with a population of 10,000 or more, and land within 2 km (population above 10,000 to 1 lakh), 6 km (above 1 lakh to 10 lakh) or 8 km (above 10 lakh) of its limits.
  • Section 83 (section 54B of the 1961 Act) gives relief to an individual or HUF who sells land that the assessee, a parent or the HUF used for agriculture in the two years before the transfer and buys other agricultural land within two years after the transfer. The gain not exceeding the cost of the new land is not charged. A gain not used by the return due date has to be deposited in a specified bank or institution under the notified scheme.

Return filing

ITR-1 and ITR-4 cannot be used if agricultural income exceeds ₹5,000. Report it in the agricultural income schedule of ITR-2 or ITR-3 as applicable, and keep the evidence of the land and the produce.

Frequently asked questions

Is agricultural income taxable?

No. It is not included in total income (Schedule II, Sl. No. 1 of the Income-tax Act, 2025), but it is taken into account to work out the tax rate on your other income if it exceeds ₹5,000 and your other income is above the basic exemption limit.

Is income from agricultural land abroad exempt?

No. The definition covers land situated in India only.

Is dairy farming, poultry or fishing agricultural income?

No. The income must be derived from land by agriculture. These activities are taxed as business income.

Is the sale of agricultural land exempt?

Rural agricultural land is not a capital asset, so there is no capital gain. Land inside the municipal limits and distance bands in the definition of capital asset is a capital asset and the gain is taxable, with relief under section 83 if you buy new agricultural land.

Which ITR form do I use if I have agricultural income?

ITR-1 and ITR-4 cannot be used if agricultural income exceeds ₹5,000. Use ITR-2 or ITR-3 as applicable.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.