Section 54EC of the Income Tax Act, of 1961, helps individuals mitigate their tax liability by claiming exemptions on tax on their long-term capital gains. This is done by investing their capital gains on particular capital gain bonds. It must be noted that the maximum investment limit in such bonds is ₹50 Lakhs in a specific financial year.

Tax Deductions u/s 54EC Based on Amount Invested

You can claim tax deductions under Section 54EC based on the amount of capital gains you invest. Here are the deductions you can claim depending on your investment:

  • Full Investment: You can enjoy tax exemption of the full capital gains amount if you invest in bonds with the full amount

  • Partial Investment: You can claim tax exemption of up to a proportionally similar amount if you invest partially

 

Illustrations of Deduction Under Section 54EC

The tax deduction that you can claim under Section 54EC depends on the amount of capital gains that you invested in the long-term specified asset. Here are some illustrations that can help you understand the deductions better:

1. Illustration for Full Investment

Suppose you accrue capital gains of ₹10 Lakhs on the sale of assets and invest the entire amount of ₹10 Lakhs in bonds. In this case, you can claim tax exemption on the entire amount of ₹10 Lakhs. 

2. Illustration for Partial Investment

If you accrue capital gains of ₹10 Lakhs on the sale of assets and invest a partial amount of ₹7 Lakhs in bonds. In this case, you can claim tax deductions on only ₹7 Lakhs. You need to pay tax on the remaining amount of ₹3 Lakhs.

 

Lock-in Period of Capital Gain Bonds

Capital gain bonds have a lock-in period of five years. Before April 2018, the lock-in period was three years. The following factors concerning the lock-in period of capital gain bonds must be considered:

  • If bonds are redeemed before maturity, tax exemption u/s 54EC won't be applicable

  • If individuals get a loan against long-term assets, it implies that they have converted the bonds into cash on the day they borrowed the loan

Eligibility Criteria

The taxpayers must fulfill the following criteria to be eligible for claiming the tax benefits u/s 54EC:

  • Investor must be an individual, HUF, company, LLP, or firm

  • Investors should have invested in such long-term capital assets post-April 1, 2000

  • Profits from long-term capital investments must be spent on specified long-term capital assets

  • The asset being sold should be land or building held for at least 24 months before the sale

 

Individuals can invest in the capital gain bonds of the following issuers: 

  • Rural Electrification Corporation Limited

  • National Highway Authority of India 

  • Small Industries Development Bank of India

  • Power Finance Corporation Limited

  • Indian Railway Finance Corporation 

 

Infrastructure companies backed by the government issue such bonds; hence, their risk factors are quite low. Individuals may mitigate these bonds before the maturity date. Besides, these bonds are not listed, so the individuals are not eligible to sell them.

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Additional Conditions to Claim Tax Benefits

Individuals can claim tax benefits under the following additional conditions as well:

  • Two Individuals Buy a Bond Together

Suppose an assessee buys a bond jointly with another individual by using the profits from selling an original asset. In that case, they will be eligible to claim tax exemptions u/s 54EC on their long-term capital gains.

  • Investments in Depreciable Assets

Suppose an individual sells a depreciable asset and has owned it for more than 36 months. They will be eligible to claim tax exemptions on such short-term capital gains. Since the depreciable assets are not considered short-term u/s 54, they will be eligible.  

  • Installments

Within six months of the date on which the assessee receives the long-term capital gains on the specified long-term assets in installments, the assessee invests the profits. In that situation, he or she may be able to exclude the capital gains used to purchase the long-term capital asset.

  • Zero Access to Long-term Capital Assets

If unable to invest capital gains in specified bonds u/s 54EC within 6 months due to unavailability, an individual may claim an exemption. The investor must explain why they could not invest the capital gains in the designated long-term assets within six months. 

 

Additionally, the individual must use the proceeds to invest in bonds whenever they become available.

  • If the Subscription is Closed

The investment qualifies for exemption u/s 54EC if an individual makes it in long-term capital assets after the 6-month grace period due to subscription closure.

Consequences of Transfer of Long-Term Specified Assets

Suppose you transfer or convert the long-term capital assets into cash within 3-5 years from FY 2018-19 from the acquisition date. In this case, the exempted amount under Section 54EC will automatically be considered long-term capital gains for the previous year. Also, these profits will incur the applicable taxes. 

 

Note that if you get loans or advances based on the security of these specified assets, they will be considered as redeemed into money on the date of taking the loan. You need to pay the applicable capital gains tax on the amount.

How to Calculate Exemption on Tax-Saving Bonds?

Let’s take a look at an example to understand how section 54EC bonds can help you save tax:

Particulars

Details

Purchase price of immovable property

₹25 Lakhs

Sale price of immovable property

₹65 Lakhs

Long-term capital gains

₹40 Lakhs

(₹65 Lakhs - ₹25 Lakhs)

  • Scenario 1: ₹40 Lakhs invested in capital gain bonds within 6 months

Since the entire amount of capital gains has been invested in eligible bonds within the specified period, the whole of ₹40 lakhs is tax-free.

  • Scenario 2: ₹30 Lakhs invested in capital gain bonds within 6 months

Since only ₹30 Lakhs out of the total capital gains has been invested in eligible bonds within the specified period, only that portion is tax-free. The remaining ₹10 Lakhs will be taxable.

 

Alternatively, if you prefer making the payment online you can also transfer the investment amount through either NEFT or RTGS. If you choose this route, enter the Unique Transaction Reference (UTR) number in the application form before submitting the same to the collecting bank branch.

Conclusion

Now that you know how to claim tax exemptions under Section 54EC, you can explore new ways to reduce your tax liabilities. If saving tax is your priority, you can invest in tax-saving investment options on Bajaj Markets. You can easily compare various options and benefit from a convenient online process with minimal documentation requirements.

FAQs

54EC bond interest income is subject to taxation. The assessee will be fully taxed on any interest they earn on these bonds.

Individuals can invest in the capital gain bonds of the following issuers::  

  • National Highway Authority of India

  • Power Finance Corporation

  • Indian Railway Finance Corporation

  • Rural Electrification Corporation Limited

Investing in capital gain bonds under Section 54EC is safe since they are government-backed investments with a AAA rating.

Yes, NRIs can also claim tax exemptions u/s 54EC. However, the asset through which the capital gain is received should be located in India.

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