Section 54EC of the Income Tax Act: Deduction on Long-term Capital Gains Explained

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 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:

• Individuals must invest in long-term capital assets, and the profits arising from them must be long-term capital gains.
• Investors must invest in that long-term capital asset after 1st April 2000.
• As mentioned earlier, the profits made from selling long-term capital assets, whether complete or partial, must be spent on long-term capital specified assets.
• Individuals must invest in the following capital gain bonds under Section 54EC:
  • REC or Rural Electrification Corporation Limited-issued bonds
  • NHAI or National Highway Authority of India bonds- issued bonds 
  • PFC or Power Finance Corporation Limited-issued bonds
  • IRFC or Indian Railway Finance Corporation Limited-issued bonds
• Government-backed infrastructure companies issue these bonds and therefore have lower risk factors. Individuals can redeem these bonds before the maturity period. Moreover, these are not listed bonds, and hence individuals are not entitled to sell these bonds.
• Individuals cannot enjoy a deduction on tax under Section 80C if they have invested their capital gains in the bonds mentioned above.

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:

• If individuals transfer or redeem these bonds into cash before the maturity period, these bonds will not qualify for tax exemption under this Section of the ITA. It will be regarded as long-term capital gains that individuals obtained in a financial year before redeeming or transferring these bonds.
• If individuals wish to secure a loan against such long-term specified asset’s security, this implies that they have redeemed such bonds into cash on a similar date they have borrowed that loan.

Note the following situations under which individuals can still claim tax exemption besides circumstances specified above:

If Two Individuals Purchase a Bond Jointly

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.

Investments on Depreciable Asset

If an individual sells a depreciable asset that he or she has owned for more than 36 months, then any gain from transfer of depreciable shall be considered as STCG. This is because depreciable assets are considered short-term capital assets. And for claiming the exemption under section 54EC the gain must be from transfer of Long term capital asset. Therefore Individual are not able to claim exemption under 54EC.

Installments

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.

No Access to Long-Term Capital Assets

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 the Subscription Is Closed

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:

• Step 1: Visit the respective official portal of the issuer of such bonds. Select the “direct” tab available on the “download” page.
• Step 2: Individuals can choose the number of forms they wish to download. Type the captcha and proceed to download.
• Step 3: The forms are downloaded in ZIP format, so extract the files accordingly and print out the forms.
• Step 4: Attach a cheque or demand draft and additional enclosures of the designated bank’s branch. Alternatively, individuals can also transfer the amount through NEFT or RTGS to the respective account. Individuals need to fill in the application form and state the payment details and the UTR number to avail this NEFT facility.

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:

• Case 1: He invested ₹ 14,00,000 in bonds issued by Rural Electrification Corporation Limited within 6 months
• Case 2: Invested ₹ 8,00,000 in bonds issued by the National Highway Authority of India within 6 months