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:
|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:
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.
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.
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 movable assets and taxed at 20% with Indexation.