Section 54EC of the Income Tax Act

Section 54EC of the Income Tax (IT) Act, 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. Read on to read about the various dimensions of Section 54EC in order to understand how you can minimise your tax liability.

Section 54EC of the IT Act, 1961, says that if an investor earns long-term capital gains by selling their immovable property or shares and re-invests them in specified long-term assets within six months from the sale date, they can claim tax exemption on such capital gains. However, it must be noted that the maximum investment limit in such bonds is Rs. 50,00,000 in a specific financial year.

The taxpayers must fulfil the following criteria in order to be eligible for claiming the tax benefits u/s 54EC of the IT Act, 1961:

• Individuals should invest in long-term capital assets and the profits thereby arising should be long-term capital gains.

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

• Profits arising from long-term capital investments (whether partial or complete), must have been spent on specified assets which are long-term capital.

 

Individuals should invest in the below-mentioned capital gain bonds u/s 54EC:

• Bonds issued by Rural Electrification Corporation Limited

• Bonds issued by the National Highway Authority of India 

• Bonds issued by the Small Industries Development Bank of India

• Bonds issued by National Housing Bank

• Bonds issued by Power Finance Corporation Limited

• Bonds issued by Indian Railway Finance Corporation

 

Note:

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

• Individuals cannot claim tax deductions u/s 80C if they invest their capital gains in any of the bonds as mentioned above.

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

• If the individuals mitigate the bonds into cash prior to the date of maturity, they will not be eligible for tax exemption u/s 54EC of the IT Act, 1961. It will be considered long-term capital gains that the individuals procured in a specific financial year before transferring or redeeming these bonds.

• If individuals wish to get a loan against long-term assets, it implies that they have mitigated such bonds into cash on the same date they borrowed their loan.

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 on Depreciable Assets

Suppose an individual sells an asset which is depreciable 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. Therefore, the individuals fulfilling the eligibility criteria can claim tax exemptions.

• Instalments

Within six months of the date on which the assessee receives the long-term capital gains on the specified long-term assets in instalments, 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

An individual may claim an exemption if they cannot invest the capital gains from the sale of long-term capital assets on the long-term specified bonds listed u/s 54EC of the ITA and within 6 months due to their unavailability. When the person explains why could not invest the capital gains on the long-term designated assets within six months, this is acceptable. Additionally, the individual must use the proceeds to invest in bonds whenever they become available.

• If the Subscription is Closed

The investment amount qualifies for exemption under Section 54EC of the ITA if an individual makes it in long-term capital assets after the 6-month grace period due to subscription closure

These long-term specified assets are available in physical or Demat forms for individual purchasing. To buy these bonds and pay less in taxes, take the following actions:

• Step 1: Go to the relevant official website of the company that issued the bonds. On the "download" page, click the "direct" tab.

• Step 2: People can select how many forms they want to download. Fill out the captcha, then click Download.

• Step 3: After downloading the forms in ZIP format, unpack the files as necessary and print the forms.

• Step 4: Include a demand draft or check and any other enclosures from the branch of the specified bank. Individuals can also transfer the money to the appropriate account using NEFT or RTGS as an alternative. To use this NEFT facility, people must fill out an application and include their UTR number, payment information, and other information.

You can avail exemptions on the interest on 54EC bonds under Section 54EC of the Income Tax Act. The investment, however, should be made within six months from the sale of the immovable property.

 

So, for instance, if you sell a plot of land on September 1, 2021, and earn long-term capital gains of ₹20 lakhs, you need to invest the gains in capital gain bonds by March 1, 2022, to claim this benefit.

Calculating the income tax exemption under Section 54EC of the Income Tax Act is easy. Let’s take a look at an example to understand how section 54EC bonds can help you save tax:

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

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

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

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

54EC bonds can be bought directly from the issuer since they’re not listed in any stock exchange. If you’re wondering how to invest in 54EC bonds, here’s a step-by-step breakdown of the purchase process.

• Step 1: Visit the official websites of the respective corporations

• Step 2: Click on the ‘Direct’ option.

• Step 3: Choose the number of forms that you wish to download.

• Step 4: Enter the captcha displayed in the relevant text box.

• Step 5: Click on the ‘Download’ button below.

• Step 6: The 54EC bond application form will be automatically downloaded in a ZIP format.

• Step 7: Unzip it to extract the form.

• Step 8: Print the 54EC bond application form and fill out all the necessary fields.

• Step 9: Submit the same along with a demand draft (DD) or an account payee cheque and other necessary documents at the designated collecting bank branches.

 

Alternatively, if you prefer making the payment online you can also transfer the investment amount through either NEFT or RTGS. However, if you choose to go this way, you would have to enter the Unique Transaction Reference (UTR) number, after making the transfer, in the respective field in the application form before submitting the same with the collecting bank branch.

Section 54EC of the Income Tax Act helps you reduce tax burden when you sell your immovable property for profit. Remember to adhere to the conditions and requirements under section 54EC about how to invest in 54EC bonds, so you can avail the benefits easily.