Section 54EC of Income Tax Act: Capital Gain Exemption

Selling long-term immovable assets like land or buildings at a generous profit margin is a moment of joy, but this long-term capital gain (LTCG) is also taxable in India. However, the taxpayer can avoid or reduce this tax liability by claiming a tax exemption according to Section 54EC of the Income Tax Act.

Section 54EC allows the taxpayer to invest the capital gain in government-secured bonds within the time frame of six months from the date of sale. Such bonds are known as capital gain bonds, and investing in these bonds is quite a famous strategy among taxpayers to avoid or reduce the tax liability on the capital gains of immovable property. This blog guide includes everything you need to know about Section 54EC of the Income Tax for NRIs and Indian residents.

What is Section 54EC?

So, whenever an individual sells a long-term immovable property, be it a building or land, they have an option to get the capital gain tax exemption under Section 54EC by investing in certain bonds. These bonds are known as section 54EC bonds or the capital gain bonds, which are a fixed-income instrument that reduces your capital gains tax liability by providing tax exemptions to the investors under section 54EC.

To be eligible for capital gain under section 54EC, the taxpayer must meet the following criteria:

Any taxpayer, including individuals, others, Hindu Undivided Families (HUFs), LLPs, companies, firms, etc., can avail exemptions under the right section 54EC.

• The immovable assets being sold should be long term capital assets, including both the building and the land. Only the assets that have been held for a minimum of 24 months or more before the sale are considered long-term assets.
• NRIs and Indian residents must invest in the bonds within six months of the date of sale of the asset.
• NRIs and Indian residents must invest in 54EC bonds: Rural Electrification Corporation (REC), National Highways Authority of India (NHAI), Indian Railway Finance Corporation (IRFC), Power Finance Corporation Limited (PFC), or any other bond as notified by the Central Government of India.
• NRIs and Indian residents can invest a total amount of INR 50 lakhs during the current financial year and the successive financial years.
• The taxpayer cannot convert, transfer, or use the bonds as collateral for a loan or advances for a minimum period of five years from the date of acquisition.

Bonds Eligible for Exemption Under Section 54EC

Here is a list of capital gains bonds that are eligible under section 54EC of the Income Tax Act.

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

What are the Key Features of the Capital Gains Bonds?

Under section 54EC, the capital gains bonds allow the taxpayer to claim tax exemption on the long-term capital gains (LTCG), and here are some of their key features:

• 54EC bonds under section 54EC are secure, safe, and AAA-rated.
• Interests on 54EC bonds are taxable, and the interest received is exempt from each tax.
• These bods have a lock-in period of five years and are non-transferable.
• The minimum Investing limit in 54EC bonds is Rs 10,000, and the maximum is Rs 50 lakhs in 500 bonds.
• The interest rate of these bonds is 5.25%, payable annually.

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

Below is an example for understanding the calculation of tax exemption under section 54EC of the Income Tax Act.

The sale price of land = Rs. 70,00,000

Indexed Cost of Acquisition = Rs. 46,00,000

Indexed Cost Improvement Rs. 10,00,000

The calculation of capital gain taxable after claiming tax exemptions is as follows in the cases mentioned below.

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

1. Investment of Rs. 14 Lakh in the REC Bonds With a Six-Month Term

2. Rs. 8 Lakhs Invested in NHAI Bonds Within Six Months

In a case where capital gains bonds were sold before maturity, the amount of capital gains on which the exemption was claimed will be taxable as long-term capital gain in the converted year.

How to Make an Investment in 54EC Bonds

Below are the steps you need to follow to invest in the bonds specified under Section 54EC of the Income Tax Act.

Step 1: Visit the official website of the issuer of the specified bonds, such as NHAI, IRFC, REC, etc.

Step 2: Now download the form for the bond in which the taxpayer wants to invest. Enter the captcha and download it.
Step 3: The form will be loaded into the XIP format.

Step 4: Unzip and extract the form.

Step 5: Fill in all the details per the provided instructions.

Step 6: Now, the taxpayer will either attach a demand draft or the cheque and other enclosures from the bank. Alternatively, they can transfer the amount via NEFT or RTGS.

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