Section 54EC- Deduction on LTCG Through Capital Gain Bonds

Updated on: May 16th, 2024

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9 min read

Selling capital assets and making a profit will result in taxation on those profits as capital gains. Nevertheless, there is a way to avoid this tax by investing the profits into specific assets. This is typically known as Capital gains exemption. We will be discussing one such exemption given under Section 54EC in detail. 

Section 54EC

When a taxpayer sells long-term immovable property (land or building or both), they have the option to avail capital gain exemption under Section 54EC by investing in certain bonds.

Section 54EC bonds, also known as Capital gain bonds are fixed income instruments which provide capital gains tax exemption under section 54EC to the investors. 

To be eligible for exemption under Section 54EC, the taxpayer must meet the following conditions:

  • The exemption under Section 54EC can be claimed by any taxpayer, including individuals, Hindu Undivided Families (HUFs), companies, LLPs, firms, and others.
  • The asset being sold should be a Long Term Capital Asset, which includes land or building or both. The asset is considered long-term if the taxpayer has held it for a minimum of 24 months prior to the sale.
  • The taxpayer must invest the Capital Gains within 6 months from the date of transfer.
  • The investment should be made in 54EC bonds: National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation Limited (PFC) bonds, or Indian Railway Finance Corporation (IRFC) Limited bonds.
  • The total investment amount cannot exceed INR 50 lakhs during the current financial year and the subsequent financial year.

Bonds eligible for exemption under section 54EC of the Income Tax Act

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

Key facts to avail the LTCG exemption by investment in capital gain bonds

  • To avail the tax exemption the investment must be made within 6 months of the date of sale of immovable property.
  • Such investment can be redeemed only after 5 years. Before April 2018 the bonds could be redeemed within 3 years.
  • The exemption on investment is allowed only against long term capital gains on sale of immovable property (i.e. sale of land or building or both).
  • The exemption is available up to a maximum amount of Rs 50 lakh

How to calculate the tax exemption by investment in tax saving bonds

Example 1: Assuming that an immovable property is sold at Rs. 70 lakh after a long term period of 42 months from the date of acquisition. The indexed cost of acquisition is 46 lakh and indexed cost of improvement is Rs. 10 lakh. Calculate the capital gain that is taxable after claiming exemption in below two seperate cases:

I.   Rs. 14 lakh invested in REC bonds within 6 months

II.  Rs. 8 lakh invested in NHAI bonds within 6 months

 

I. Rs. 14 lakh invested in REC bonds within 6 months

ParticularsAmount (Rs.)
Sale consideration 70 lakh 
Less: Indexed cost of acquisition46 lakh
Less: Indexed cost of improvement10 lakh
Long-term capital gain14 lakh
Less: Investment in REC bonds 14 lakh
Taxable long-term capital gainNil

II. Rs. 8 lakh invested in NHAI bonds within 6 months

ParticularsAmount (Rs.)
Sale consideration 70 lakh 
Less: Indexed cost of acquisition46 lakh
Less: Indexed cost of improvement10 lakh
Long-term capital gain14 lakh
Less: Investment in REC bonds 8 lakh
Taxable long-term capital gain6 lakh

In case if the capital gain bonds are converted into cash before the period of maturity, then the amount so invested on which tax exemption was claimed, shall be taxable as long-term capital gain in the year of conversion.

For example, in above case if the bonds are redeemed before the maturity date, say in the financial year 2020-21, then Rs. 8 lakh shall be taxable as long-term capital gain in the financial year 2020-21.

Example 2: Assuming that an immovable property is sold at Rs. 90 lakh after a long-term period of 42 months from the date of acquisition. The indexed cost of acquisition is 20 lakh, and the indexed cost of the improvement is Rs. 10 lakh. Calculate the capital gain that is taxable after claiming exemption in below two cases:

I.   Rs. 55 lakh invested in REC bonds within 6 months

Particulars

Amount (Rs.)

Sale consideration 

90 lakh 

Less: Indexed cost of acquisition

20 lakh

Less: Indexed cost of improvement

10 lakh

Long-term capital gain

60 lakh

Less: Investment in REC bonds 

50 lakh

Taxable long-term capital gain

10 lakh

Note: The Maximum Deduction allowable is 50 Lakh only.

How to make investment in 54EC bonds

These bonds are not listed on the stock exchange. Hence you can buy them by the issuer directly either in a demat form or a physical form. Let us understand how to invest in the above mentioned bonds:

  • Step 1: Download the respective bond Form from here –
  • Step 2: Choose the‘ direct’ option on the download page.
  • Step 3: Select the number of forms to download.
  • Step 4: Enter the captcha and download.
  • Step 5: The form downloads in ZIP format.
  • Step 6: Unzip and extract the form
  • Step 7: Print the form and fill as per the given instructions.
  • Step 8: Investors should attach either a demand draft or account payee cheque and necessary enclosures at the designated branches of collecting banks – Axis Bank, Canara Bank, State Bank of India, HDFC Bank, ICICI Bank, IDBI Bank, IndusInd Bank or Yes Bank.
  • Step 9: You can also directly deposit the amount in the respective collection account by way of NEFT/RTGS and invariably fill the application forms as given on the website online and mention the UTR no. at space provided in the application form. 

Related Articles

LTCG Calculator

2018 Amendment to Section 54EC
Capital Gain Exemption
Capital Gain Exemption on Sale of Land

 

Frequently Asked Questions

What is the lock-in period for 54EC Bonds?

The lock-in period for 54EC Bonds is 5 years, during which the invested amount cannot be redeemed or transferred.

When do investors have to invest in 54EC Bonds after selling an asset for claiming an exemption?

Investors need to make an investment in 54EC Bonds within 6 months from the date of the sale of their asset generating capital gains.

Can 54EC Bonds be held in a Demat account?

Yes, investors have the flexibility to hold 54EC Bonds in Demat accounts or in physical form based on their preference.

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Quick Summary

Capital gains exemption under Section 54EC allows tax relief by investing in specified bonds within 6 months of selling long-term immovable assets. Conditions include holding the asset for 24 months, investment limit of INR 50 lakhs, bonds redemption after 5 years, and exemption against long-term capital gains. Calculations needed for tax exemption under different investment scenarios.

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