Budget 2018 – Amendment to Section 54EC

Updated on: Apr 27th, 2024

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5 min read

Proposed amendment under Section 54EC

Proposed amendment under Section 54EC

Budget 2018 has inter alia proposed an amendment to Section 54EC of the Income-tax Act. This section currently provides for an exemption of long-term capital gains(“LTCG”) on the sale of any Long Term Capital Asset provided the capital gains are invested within 6 months from the date of transfer in certain long-term specified assets viz any bond, redeemable after three years and issued on or after the 1st day of April 2007 by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 or by the Rural Electrification Corporation Limited(REC).

Vide the budget, the government has proposed to amend the above section by restricting its scope only to capital gains arising from long-term capital assets, being land or buildings or both. It is also proposed to provide that long-term specified asset, for making any investment under the section on or after the 1st day of April 2018, shall mean any bond, redeemable after five years as against the earlier three years and issued on or after 1st day of April, 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf.

This amendment will take effect from 1st April 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.

Above is summarised in the below table

 

Earlier Provision

After Amendment

Capital Asset

Any  Long Term Capital Asset

capital gains arising from long-term capital assets, being land or building or both

Maturity

Redeemable after three years

Redeemable after five years

Example: During FY 2024-25, Mr A sold the shares, and there was a Long-Term Capital Gain of Rs 10,00,000. Can he take an Exemption under 54EC?

A: No, Mr A Cannot Claim Exemption under 54EC because 54EC is only available for capital gains arising from land, buildings, or both.

This amendment will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.

Our take

While the intention of the legislature behind this amendment has not clearly been spelt out in the Memorandum to the Finance Bill, one can infer that this would come down heavily on investors earning LTCG on sale of shares especially listed shares and units of equity oriented funds as they can neither claim an exemption under Section 10(38) nor can they reduce their tax burden by claiming an exemption under Section 54EC as this exemption is, as already stated above, now available only if LTCG is on account of transfer of land or building or both.

Frequently Asked Questions

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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Quick Summary

Budget 2018 proposed an amendment to Section 54EC of the Income-tax Act regarding capital gains exemption on long-term assets such as land or buildings, limiting it to five years maturity bonds issued after April 1, 2018. This change impacts investors earning LTCG on shares or equity funds. The amendment takes effect on April 1, 2019, applicable to assessment year 2019-20 and later.

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