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.
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:
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
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:
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:
Also read: Section 24 Of The Income Tax act
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.
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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