All about exemptions under Section 54EC of Income Tax Act

According to Section 54EC, taxpayers are free from paying taxes on long-term capital gains. Any capital gains produced from the sale of immovable property in possession for 2 years or more are eligible for this exemption.

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To qualify for the exemption provided by this provision, taxpayers must invest their long-term capital gains in qualifying bonds. The bonds are deemed risk-free for this section because the government backs them.

Section 54EC exemption: Eligibility

The high long-term capital gain tax, which is levied at a rate of 20% excluding cess and surcharge, is relieved by section 54EC’s exemption. To qualify for exemptions under Section 54EC, adhere to these conditions:

Type of asset: The sold asset (land or building) must be a long-term capital asset, held for over two years before sale.

Investment in specified bonds: Capital gains from the asset’s sale must be invested in specified bonds within six months of the sale.

Lock-in period: The investment in specified bonds must be held for a minimum of five years. Transferring or converting bonds before completion of five years revokes tax benefits.

Maximum investment limit: The maximum investment in specified bonds is Rs 50 lakh per financial year. Excess capital gains beyond this limit won’t receive tax benefits.

Section 54EC of Income Tax Act: Eligible investments

The qualified bonds that can grant an exemption of up to Rs 50,00,000 have been stipulated by the requirements of section 54EC. The list of bonds eligible under this section is shown below.

Rural Electrification Corporation Limited
National Highway Authority of India
Bonds notified by the Central Government

Section 54EC: Conditions under which exemptions are withdrawn

The taxpayer will lose access to this exemption advantage in case of the following:

If you change the long-term asset into money before 5 years.
The asset is transferred before 5 years.
If the assessee has borrowed money or received an advance against a long-term asset.

Tax calculation on exemptions under section 54EC

To calculate tax on exemptions under Section 54EC, consider this example. Suppose you buy a house for Rs 50 lakh and sell it for Rs 90 lakh after five years. The indexed cost of acquisition and improvement amounts to Rs 70 lakh and Rs 7 lakh, respectively.

Calculation of Capital Gains: Sale Consideration – Indexed Cost of Acquisition – Indexed Cost of Improvement = Long-term Capital Gains.

Example: Your capital gains = Rs 13 lakh (90 lakh – 70 lakh – 7 lakh)

Formula for Tax Calculation: Capital Gains – Investment in Capital Gains Bond.

So, if you invest Rs 13 lakh in the NHAI bond, your Capital Gains become zero. If invested in REC bonds, Capital Gains will be Rs 3 lakh (13 lakh – 10 lakh).

Section 54EC: Ways to invest in 54EC bonds

The bonds for investment that qualify for the exemption provided by Section 54EC are not publicly traded. Hence, investors need to buy these stocks from the company that issued the bonds, which are available in physical or Demat form.

Select the bond and visit its website to start investing
Go to the download page and Choose the ‘Direct’ option
Select the number of forms and enter the given captcha code to download
Extract the forms downloaded in the zip format
Fill out the form carefully and submit it at any branch of the partner bank
Submit necessary documents, cheque, or a demand draft with the form

Investors can also apply online at the bond’s website. The NEFT or RTGS means of payment are available for the bond. The UTR number must be mentioned by investors in the application.

All about: Income tax

Section 54EC Amendment

According to former rules, if any long-term asset is sold and the proceeds are invested in certain bonds within six months, this section will exempt the sale. Following the modification of the 2018 finance budget, only the long-term immovable property sale is eligible for an exemption under this clause.

As opposed to the previous duration of three years, the bonds can be redeemed after five years.

FAQs

What is Section 54EC of Income Tax Act?

Section 54EC of Income Tax Act provides an exemption from taxes on long-term capital gains. This provision allows taxpayers to invest their long-term capital gains into qualifying bonds, thereby receiving a tax exemption of up to Rs 50,00,000.

What are the eligible investments under Section 54EC?

The list of bonds eligible under this section includes Rural Electrification Corporation Limited (REC), National Highway Authority of India (NHAI) Bonds, and bonds notified by the Central Government.

What are the conditions under which Section 54EC exemptions are withdrawn?

The taxpayer will lose access to this exemption advantage in case of changing the long-term asset into money before 5 years, transferring the asset before 5 years, borrowing money or receiving an advance against a long-term asset.

What are the ways to invest in 54EC Bonds?

Investors can buy these bonds from the company that issued them, either in physical form or Demat form. Alternatively, investors can apply online on the bond's website.

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Dhwani Meharchandani

Dhwani is a content management expert with over five years of professional experience. She has authored articles spanning diverse domains, including real estate, finance, business, health, taxation, education and more. Holding a Bachelor’s degree in Journalism and Mass Communication, Dhwani’s interests encompass reading and travelling. She is dedicated to staying updated on the latest real estate advancements in India.
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