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CMA Intermediate · Direct and Indirect Taxation · Capital Gains

Mr. Vikram Shah, an individual, sold agricultural land that he had used for agriculture in the two years before the sale, and earned a capital gain of Rs 18,00,000. Within two years he bought other agricultural land for Rs 25,00,000. Under section 83 of the Income-tax Act, 2025, what is the position on the gain and on the cost of the new land if it is transferred within three years of purchase?

The whole gain of Rs 18,00,000 escapes tax because it is less than the new land's cost of Rs 25,00,000. If the new land is sold within three years, its cost is reduced by the gain to Rs 7,00,000. Nil cost applies only when the gain exceeds the new land's cost.

  1. AGain of Rs 18,00,000 is not charged; cost of new land for computing gain on its transfer within three years is Rs 7,00,000Correct
  2. BGain of Rs 18,00,000 is not charged; cost is Rs 25,00,000
  3. CGain of Rs 7,00,000 is charged; cost is nil
  4. DGain of Rs 18,00,000 is not charged; cost is nil

Explanation

The gain of 18,00,000 is less than the cost of the new land of 25,00,000, so no capital gain is charged under section 83(1)(ii). For a transfer of the new land within three years, its cost is reduced by the gain: 25,00,000 - 18,00,000 = 7,00,000. Nil cost applies only when the gain exceeds the cost of the new asset.

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