Section 54EC - Capital Gain Bonds Under 54EC of Income Tax Act

What is Section 54EC of the Income Tax Act?

Section 54EC of the Income Tax provides taxpayers with an opportunity to avail of an exemption from the capital gains tax. Section 54EC is applicable when an individual sells his/her long-term immovable property and invests in certain specified capital gains bonds

Bonds Eligible for Exemption under Section 54EC of the Income Tax Act

• Rural Electrification Corporation Ltd. or REC Bonds.
• NHAI bonds or National Highway Authority of India
• PFC bonds or Power Finance Corporation Ltd.
• Indian Railway Finance Corporation Ltd. or IRFC Bonds

What is a Capital Asset?

Capital assets are defined as any kind of asset or property held by an individual, whether related to business or not. The assets can be movable or immovable, tangible or intangible, fixed or circulating. Some examples of capital assets are buildings, land, cars, machinery, furniture, jewelry, trademarks, debentures, etc.

• Short-Term Capital Assets
  Assets that are held for a period of less than three years (12 months for equity shares and equity-based mutual funds) are known as short-term capital assets. When short-term capital assets are sold, it results in short-term capital gains.
• Long-Term Capital Assets
  Long-term capital assets are the assets held for a period of more than three years (12 months for equity shares and equity-based mutual funds). When long-term capital assets are sold, it results in long-term capital gains.

Who is Eligible to Claim Exemption Under Section 54EC?

The following are the eligibility criteria to claim the exemption under section 54EC of the Income Tax Act -

• The exemption under section 54EC of the Income Tax Act can be claimed by any taxpayer, whether individual, HUF, LLPs, firms, or companies.
• The exemption is applicable only to the capital gains resulting from the sale of long-term capital assets on the sale of immovable property, including land and/or buildings.
• The taxpayer should invest the capital gains amount in capital gain bonds within six months of the date of transfer.
• The investment has to be made in any of the specified capital gains bonds like REC, NHAI, PFC, or IRFC.
• The total investment amount during the current and next financial years should not be less than Rs.50 lakhs.

What are the Key Features of Capital Gains Bonds Under Section 54EC?

54EC bonds allow taxpayers to claim tax exemption on long-term capital gains. Some of its key features are -

• 54EC bonds are safe and secure and AAA-rated.
• Interest on 54EC bonds is subject to tax. There is no TDS deduction on interest received from 54EC bonds, and wealth tax is exempted.
• 54EC bonds are non-transferable and have a lock-in period of 5 years.
• You have to invest a minimum of Rs.10,000 in one bond and a maximum of Rs.50 lakhs in 500 bonds.
• 54EC bonds have an interest rate of 5.25%, payable annually.

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How to Invest in Bonds Specified Under Section 54EC of the Income Tax Act

Given below are the steps you need to follow to invest in bonds specified under section 54EC of the Income Tax Act -

• Step 1. Visit the website of the issuer of the specified bonds like REC, NHAI, PFC, IRFC, etc.
• Step 2. Now download the form for the bond in which you want to invest your capital gains. Enter the captcha and click on download.
• Step 3. The respective form gets downloaded in Zip format.
• Step 4. Unzip and extract the form
• Step 5. Fill out the form as per the instructions provided
• Step 6. Either attach a cheque/demand draft and other enclosures of the bank or transfer the amount via RTGS or NEFT to the respective accounts.

How to Calculate Tax Exemption Under 54EC of the Income Tax Act

Let’s understand the calculation of tax exemption under section 54EC of the Income Tax Act.
The sale price of a land = Rs.70,00,000
Indexed Cost of Acquisition = Rs.46,00,000
Indexed Cost of Improvement = Rs.10,00,000
Calculate the capital gain taxable after claiming exemption in the below-mentioned cases -

1. Investment of Rs.14 lakhs in REC bonds within six months
2. Investment of Rs.8 lakhs in NHAI bonds within six months

• Investment of Rs. 14 lakhs in REC bonds within six months
  

  Particulars	Amount
  Sale Consideration	Rs.70 lakhs
  Less: Indexed Cost of Acquisition	Rs.46 lakhs
  Less: Indexed Cost of Improvement	Rs.10 lakhs
  Long-term Capital Gain	Rs.14 lakhs
  Less: Investment in REC Bonds	Rs. 14 lakhs
  Taxable long-term capital gains	Nil

• Rs.8 lakhs invested in NHAI Bonds within six months
  

  Particulars	Amount
  Sale Consideration	Rs.70 lakhs
  Less: Indexed Cost of Acquisition	Rs.46 lakhs
  Less: Indexed Cost of Improvement	Rs.10 lakhs
  Long-term Capital Gain	Rs.14 lakhs
  Less: Investment in REC Bonds	Rs. 8 lakhs
  Taxable long-term capital gains	Rs. 6 lakhs

If the capital gains bonds are sold before their maturity, the amount of capital gain on which the exemption was claimed will be taxable as long-term capital gain in the year in which it is converted.

Section 54EC of the Income Tax Act provides a tax-saving opportunity for individuals selling long-term immovable property. Investors can enjoy tax exemptions by investing in specified capital gains bonds like those issued by REC, NHAI, PFC, or IRFC. If you also want to save capital gains tax and don’t know how to do it, get help from Tax2win’s tax experts to get tailored solutions for your tax needs. Get Tax Consultancy Services from Tax2win Now!