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.
In the Budget 2024 FM Nirmala Sitharaman has proposed changes in the tax rate on short-term capital gains from 15% to 20%. And long-term capital gains on financial and non-financial capital assets will attract tax at the rate of 12.5% instead of 10%, along with the same the tax exemption limit for the long term capital gains have been extended to Rs 1.25 lakhs.
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 Rs.46 lakh and indexed cost of improvement is Rs.10 lakh. Calculate the capital gain that is taxable after claiming exemption in below two separate cases:
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 2023-24, then Rs.8 lakh shall be taxable as long-term capital gain in the financial year 2023-24.
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 Rs.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.5 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:
Related Articles
2018 Amendment to Section 54EC
Capital Gain Exemption
Capital Gain Exemption on Sale of Land
Capital gains exemption allows avoiding tax by investing in specific assets. Section 54EC provides exemption for investing in certain bonds like NHAI, REC, PFC, and IRFC. Maximum investment allowed is INR 50 lakhs. Redemption can only be made after 5 years. Calculating taxable capital gains after investment can be done based on the amount invested in different bonds.