The income tax department has laid down a list of Capital Gain Exemption on the sale of specified assets by the taxpayer. The taxpayer on fulfilling certain conditions can claim such exemptions to reduce their Capital Gains Tax. Exemption under Section 54EC of the Income Tax Act is available on Capital Gains on the sale of land or building or both being LTCA and purchase of bonds of NHAI or REC. The amount of Exemption under Section 54EC will be lower of:
- The Cost of NHAI/REC Bonds,
- The Capital Gains on the sale of land or building.
Budget 2018 Update
Under Budget 2018, the finance minister proposed to amend Section 54EC of the Income Tax Act. The new provision was applicable from 1st April 2019 i.e. FY 2019-20 onwards.
Section 54EC provision upto FY 2018-19
As per the older provision, if the taxpayer sells any long term capital asset, he/she can claim capital gain exemption under Section 54EC on investment in long term specified assets. These specified assets include NHAI or REC bonds redeemable after 3 years issued on or after 1st April 2007.
Section 54EC provision FY 2019-20 onwards
As per the amended provision, if the taxpayer sells a long term capital asset being land or building or both, he/she can claim capital gain exemption under Section 54EC on investment in long term specified assets. These specified assets include NHAI or REC bonds redeemable after 5 years issued on or after 1st April 2018.
Who can claim an exemption under Section 54EC of Income Tax Act?
A taxpayer can claim an exemption u/s 54EC if he/she fulfills all the below conditions:
- Any assessee can claim exemption u/s 54EC. Therefore, an Individual, HUF, Company, LLP, Firm, etc can claim this exemption
- The asset sold is a Long Term Capital Asset (LTCA) being land or building or both. The asset is long-term in nature if the taxpayer holds it for at least 24 months before selling.
- The taxpayer invests Capital Gains within 6 months from the date of transfer
- Taxpayer invests in 54EC bonds of the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), or any other bonds notified by the Central Government.
- The investment amount can not be more than INR 50 lakhs during the current and succeeding financial year.
The taxpayer can claim the Capital Gains Exemption under Section 54EC while filing ITR for that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.
What is the amount of exemption available under Section 54EC of Income Tax Act?
As mentioned above, the Amount of Exemption under Section 54EC will be the least of the following:
- The Cost of NHAI/REC Bonds
- The Capital Gains on the sale of land or building
Example: Jay sold land in FY 2021-22 for Rs. 60,00,000. It was purchased in FY 2016-17 for Rs. 30,00,000. And Jay purchased NHAI bonds for Rs. 45,00,000 in FY 2021-22. Jay will be able to claim deduction under section 54EC as follows:
| Particulars | Amount |
| Sales Consideration | 60,00,000 |
| Less: Index Cost of Acquisition (30,00,000*317/264) | (36,02,272) |
| Long Term Capital Gains | 23,97,728 |
| NHAI Bonds Price | 45,00,000 |
| Section 54EC Exemption Amount | 23,97,728 |
What happens to exemption if taxpayer sells the 54EC Bonds?
The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54EC of Income Tax Act. And the following situations can arise:
Situation 1:
When the taxpayer sells the bonds within 5 years from the date of purchase.
Consequences: The exemption under Section 54EC is withdrawn. The amount of exemption that the taxpayer avails will be reduced from the cost of the asset. Thus, Capital Gains will be the total sales value minus the cost of the asset.
Situation 2:
When the taxpayer sells the bonds after 5 years from the date of purchase.
Consequences: The exemption under Section 54EC is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains on bonds sold.
FAQs
No. The Benefit of investing in CGAS is not available under section 54EC. The taxpayer needs to invest in bonds within 6 months of the date of transfer of asset.
Yes, NRI can claim exemption u/s 54EC of the Income Tax Act. Provided the land or building sold is situated in India.
LTCA are taxed at special rates. Land and Building are considered immovable assets and taxed at 20% with Indexation.
as per the recent budget announced : the limit is capped to 10 crores ! what is this regarding ? can u pls clarify ?
Hi @HIREiN,
The capital gain exemption limit capped to ₹10 crores is applicable to only section 54 and section 54F.
However, for section 54EC the maximum exemption available is ₹50 lakhs during the financial year.
Hope it helps.
Hi @Sachin1
For exemption under section 54EC, the gains should arise from land or building or both, and the gains should be invested in 54EC bonds (such as NHAI, REC, PFC, IRFC, or any other bonds notified by the Central Government) within 6 months from the date of sale of immovable property.
The maximum exemption available under section 54EC is ₹50 lakhs.
Hi @Vinay_R,
Yes, you can take exemption under section 54EC on the sale of land or building or both being LTCA, which does not include STCA and from the sale of its proceeds, you purchase bonds of NHAI or REC. If conditions satisfied.
There’s no particular provision mentioned for slum sales u/s 54EC.
Hi @Vinay_R,
Yes, the Slump Sale proceeds (50B) can be invested in 50EC.
Hi @someguy,
If you sell a residential house property and from its sale proceeds, acquire another residential house property, then section 54 will be applicable, if conditions are satisfied.
If you sell any long-term capital assets and reinvest the profits on specific capital gain bonds like REC, NHAI, etc. then section 54EC is applicable, if conditions are satisfied.
The process can be done online and offline both, here’s the link for REC, PFC, IRFC bonds for your refernce.
Hi @Supraja_Narasimhan
As per your stated situation, it’s not compulsory to purchase 4 separate bonds, irrespective of the number of sale deeds, you can as well invest in a particular bond.
The point is that you can claim the amount of exemption the same as your capital gains, then it is up to you to invest in any number of bonds. Conditions are applicable.
Hope this clarifies.
Hi @DravidM
Yes, the proceeds from a slump sale can be invested in Section 54EC bonds.
Under the provisions of the Income Tax Act, the benefit of Slump sale is available under sections 54EE, 54F, and 54EC.
This benefit is available if the entire amount of capital gains is invested in a residential property within the specified time frame.
Here’s the link for REC , PFC , IRFC bonds for your refernce. These bonds have a lock-in period of three years.
However, in a slump sale, the entire value is considered as a whole and is not separately calculated for land or building.