Section 54EC: Applicable Exemptions, Capital Assets, And Bonds

Income Tax

Section 54EC of the Income Tax Act lays down provisions for tax exemption of long-term capital gains if invested in specific instruments within a specific time frame. However, there are certain conditions that a taxpayer needs to meet to be eligible for tax exemption under this section.

Read on to know more.

Applicable Exemption under Section 54EC of Income Tax Act

Section 54EC states that if a profit is made from the sale of a long-term capital asset, such as land or property, or stocks and shares, and the profit is utilised in specified assets within 6 months from the date of sale, the capital gains are tax exempted.

There are a few points to remember regarding this section. Find them below:

1. The long term assets need to be in the form of government notified securities and bonds, such as those issued by Rural Electrification Corporation (REC) and National Highways Authority of India (NHAI). 
2. The maximum exemption limit under this section is Rs. 50,00,000. If your capital gains exceed the amount of Rs. 50 lakh, you will have to pay long-term capital gains (LTCG) tax on the remaining amount.
3. The bonds or securities you purchase with the capital gains must be kept with you for at least 5 years. If you sell the bonds before this lock-in period, you will have to pay LTCG tax on the original capital gains amount.
4. Capital gains will be eligible for tax exemption only if you invest the amount in a specified asset within 6 months from the date of sale.

Let us understand this with the help of an example,

Suppose Ajay makes a capital gain worth Rs. 20,00,000 by selling his land. He utilises this amount towards purchasing NHAI bonds. In this case, the entire amount of capital gain will be exempted from tax.

On the other hand, if he utilises only Rs. 12,00,000 in NHAI bonds and keeps the rest. In this case, he will be eligible for tax exemption on the investment sum, i.e., Rs. 12,00,000. He will have to pay tax on the remaining amount of Rs. 8,00,000.

Also read: Section 54 Of The Income Tax Act

About Capital Assets

Section 54EC mentions capital gains from capital assets. But, what is a capital asset?

As per Section 2 (14) of the Income Tax Act, capital assets are assets held by an individual, irrespective of their relation to a business. Based on this, we can say that capital assets are any type of property, movable or immovable, circulating or fixed, intangible or tangible. 

A few examples of capital assets under this section are land, building, machinery, car, patents, jewellery, furniture, trademarks, shares, debentures, and more.

However, as per current rules, a few assets do not fall under the category of capital assets. They are:

• Movable property if kept for personal use
• Raw materials, consumable stores, etc. that are kept for business purposes
• Agricultural property or land situated in a rural setting
• National defence gold bonds or 6.5%, 7% gold bonds issued by the Central Government
• Gold deposit bond under the Gold Deposit Scheme (GDS)
• Special bearer bonds

Capital Bonds by NHAI and REC

Some of the bonds specified under Section 54EC of the Income Tax Act are issued by NHAI and REC. Here are a few highlights of such bonds:

• They carry an interest rate of 5% pa.
• These bonds carry an AAA rating, which shows their security and stability.
• They do not feature listings on the stock exchange.
• You can buy them in DEMAT format or even physically.
• To buy these bonds, you need to produce a copy of your PAN card, address proof, and a cancelled cheque.

Also read: Section 24 Of The Income Tax act

Final Word

Knowing all about Section 54EC of the Income Tax Act can be helpful for taxpayers who plan to utilise their capital gains through the sale of a house or property towards government-issued bonds. 

Frequently Asked Questions

What types of bonds are eligible under Section 54EC of the Income Tax Act?

Section 54EC extends tax exemption for capital gains used against specific bonds. They may include bonds issued by Rural Electrification Corporation Limited (REC), Power Finance Corporation Limited (PFC), National Highway Authority of India (NHAI) and Indian Railway Finance Corporation Limited (IRFC).

How can I invest in bonds eligible for exemption under Section 54EC?

These bonds are not available on the stock exchange. You can purchase them directly from the issuer in physical or DEMAT form. 

To start, download the bond form from the issuer’s website, take a print out and fill it up as required. Upon that, attach an account payee cheque or demand draft and deposit the amount at designated banks. You can also make the payment through NEFT/RTGS to complete the purchase.

Can every taxpayer claim benefits under Section 54EC?

Yes, all taxpayers can claim tax exemption under Section 54EC of the Income Tax Act. Unlike Section 54F and 54, where the benefits are available to Individuals and Hindu Undivided Families (HUFs), provisions of this section are applicable to all classes of taxpayers.

I invested in NHAI bonds, but the date of its issue is beyond 6 months. Am I eligible for tax exemption under Section 54EC?

The eligibility of exemption under this section depends upon the date of payment made by you towards such investments. So, if NHAI has received your payment within a 6 month period, you are eligible to claim tax benefits under Section 54EC of the Income Tax Act.

Is it possible to claim a tax exemption of more than Rs. 50 lakh under this section?

No, as per the provisions under this section, you can claim tax exemption of up to Rs. 50 lakh for capital gains made through the sale of an immovable asset and then utilising the amount to purchase specific securities or bonds.

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.