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Section 54EC of the Income Tax Act allows individuals to reduce tax liability by claiming tax exemptions on the Long-Term Capital Gains by investing the profits arising from a sale of a long-term capital asset on specific capital gain bonds. To know more information about it, keep reading.
Section 54EC of the ITA mentions that if an investor earns profits from selling a long-term capital asset – be it shares or immovable property, and invests it in long-term specified assets within the 6 months from the date of sale, the capital gains qualify for tax exemption. The maximum investment limit in these bonds is ₹ 50,00,000 in a given financial year.
Taxpayers can avail the tax benefits under Section 54EC of the Income Tax Act after meeting the following criteria:
The lock-in period of capital gain bonds is 5 years. Before April 2018, the lock-in period was 3 years.
Consider the following factors regarding the lock-in period of capital gain bonds:
Note the following situations under which individuals can still claim tax exemption besides circumstances specified above:
Suppose an assessee purchases a bond with another member using profits earned from selling an original asset. In that case, that individual can claim tax exemption under Section 54EC on long-term capital gains.
If an individual sells a depreciable asset that he or she has owned for more than 36 months, then he or she can claim tax exemption on such short-term capital gains. This is because depreciable assets are not considered short-term capital assets under Section 54. Therefore, if an individual meets the eligibility parameters specified under Section 54E, he or she qualifies to claim tax benefits under this Section of the ITA.
An assessee invests the long-term capital gains on the long-term specified assets within 6 months from the date of receiving such profits in instalments. In that case, he or she can claim exemption on the capital gains spent on the long-term capital asset.
If an individual cannot invest the capital gains arising from the sale of long-term capital assets on the long-term specified bonds stated under Section 54EC of the ITA and within 6 months due to their non-availability, then he or she can claim exemption. This is valid when that individual provides a legitimate reason for his or her inability to invest the capital gains on long-term specified assets within 6 months. It is also necessary that the individual invest the profits on purchasing bonds once they are available.
If an individual invests in long-term capital assets after the expiry of 6 months due to closure of subscription, that investment amount qualifies for exemption under Section 54EC of ITA.
Individuals can purchase these long-term specified asset physical or Demat forms. Follow the steps mentioned below to invest in these bonds and lower tax liabilities:
To understand the calculation, let’s take a look at the following example –
Mr Amar sold an immovable property at ₹ 70,00,000 after 42 months from the acquisition of that property. ₹ 46,00,000 is the indexed acquisition cost, and the indexed improvement cost is ₹ 10,00,000. Thus, Mr Amar will calculate the taxable capital gains after saving on tax liabilities under Section 54EC of the Income Tax Act due to investments mentioned below:
|
Particulars of Calculation |
Amount to be Calculated |
|
Selling Amount an Immovable Property |
₹ 70,00,000 |
|
Deduct: Indexed Acquisition Cost |
₹ 46,00,000 |
|
Deduct: Indexed Improvement Cost |
₹ 10,00,000 |
|
Total LTCG |
₹ 14,00,000 |
|
Deduct: Investment in Bonds Issued by Rural Electrification Corporation Limited |
₹ 14,00,000 |
|
Amount of Long-Term Capital Gains That Is Taxable |
0 |
|
Particulars of Calculation |
Amount to be Calculated |
|
Selling Amount of an Immovable Property |
₹ 70,00,000 |
|
Deduct: Indexed Acquisition Cost |
₹ 46,00,000 |
|
Deduct: Indexed Improvement Cost |
₹ 10,00,000 |
|
Total LTCG |
₹ 14,00,000 |
|
Deduct: Investment in Bonds Issued by National Highway Authority of India |
₹ 8,00,000 |
|
Amount of Long-Term Capital Gains That Is Taxable |
₹ 6,00,000 |
As mentioned earlier, if an individual redeems a specified bond and converts it into cash before the completion of the maturity period, then the investment amount is taxable in the financial year during which the bond has been redeemed.
Thus, Section 54EC of the Income Tax Act helps taxpayers lower their tax burden by meeting the aforementioned specific parameters.
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