Updated on: Apr 2nd, 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.
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:
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
Particulars | Amount (Rs.) |
Sale consideration | 70 lakh |
Less: Indexed cost of acquisition | 46 lakh |
Less: Indexed cost of improvement | 10 lakh |
Long-term capital gain | 14 lakh |
Less: Investment in REC bonds | 14 lakh |
Taxable long-term capital gain | Nil |
II. Rs. 8 lakh invested in NHAI bonds within 6 months
Particulars | Amount (Rs.) |
Sale consideration | 70 lakh |
Less: Indexed cost of acquisition | 46 lakh |
Less: Indexed cost of improvement | 10 lakh |
Long-term capital gain | 14 lakh |
Less: Investment in REC bonds | 8 lakh |
Taxable long-term capital gain | 6 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.
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:
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2018 Amendment to Section 54EC
Capital Gain Exemption
Capital Gain Exemption on Sale of Land
Capital gains exemption under Section 54EC allows taxpayers to invest in specific bonds to defer tax on profits from selling long-term immovable property. Investments must be made within 6 months in bonds like NHAI, REC, PFC, or IRFC. Exemptions are available up to INR 50 lakhs and bonds can be redeemed after 5 years. How to calculate taxable capital gains after investments in bonds? How to invest in 54EC bonds? What are important conditions to claim tax exemption under 54EC?