23 Dec 2021
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If you have recently made a sale of any immovable property for a nice profit, you may be looking at quite a bit of capital gains tax. However, there are many provisions in the Income Tax Act, 1961 that can help you reduce the burden of taxation of capital gains. And Section 54EC is one such provision. Under this section, the Income Tax Act introduces capital gains bonds or 54EC bonds. By investing in these bonds, you can get an exemption on the capital gains.

What are Section 54EC bonds?

As per section 54EC of the Income Tax Act, capital gain bonds or Section 54EC bonds are securities that offer a fixed income to the investor. These bonds are generally issued by infrastructure companies. The investor becomes a creditor to the entity that has issued these capital gain bonds.

Here are the primary features of Section 54EC bonds-

 

  • They are secure investments that are AAA rated.

  • Currently, they offer interest at the rate of 5% payable annually.

  • The interest earned from these bonds is taxable.

  • These capital gain bonds come with a lock-in period of 5 years.

  • The minimum investment in these bonds is 1 bond of ₹10,000.

  • The maximum investment in these bonds is 500 bonds of ₹50,00,000.

Bonds eligible for exemption under Section 54EC of the Income Tax Act

If you want to claim an exemption under Section 54EC of the Income Tax Act, you need to invest in capital gain bonds. The following securities are considered as section 54EC bonds.

 

  • Rural Electrification Corporation Limited or REC bond

  • Power Finance Corporation Limited or PFC bonds

  • National Highway Authority of India or NHAI bonds

  • Indian Railway Finance Corporation Limited or IRFC bonds

How to avail the LTCG exemption by investment in capital gain bonds?

To avail the exemption under Section 54EC of the Income Tax Act, you need to invest in section 54EC bonds as per the requirements under the Act. The investment 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.

How to calculate the tax exemption by investing in tax saving bonds?

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.  

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

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.

How to buy 54EC bonds online?

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.

  • Firstly, you would have to download the bond application. Click on the links below to download the respective form.

Rural Electrification Corporation bonds

 

National Highways Authority of India bonds

 

Power Finance Corporation bonds

 

Indian Railway Finance Corporation Limited bonds

 

  • Once you’ve navigated to the webpage, click on the ‘Direct’ option.

  • Then, choose the number of forms that you wish to download.

  • Enter the captcha that’s displayed in the relevant text box.

  • Click on the ‘download’ button below.

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

  • Once the ZIP has been downloaded, unzip it to extract the form.

  • Print the 54EC bond application form and fill all of the fields manually according to the instructions provided.

  • Once you’ve filled out the application form, submit the same along with a demand draft (DD) or an account payee cheque and other necessary documents at the designated collecting bank branches. Make sure to enter the DD/cheque number on the application form before submitting it.

  • 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.

Conclusion

Section 54EC of the Income Tax Act helps you reduce the burden of tax 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.