Section 54EC of Income Tax Act : Capital Gains Exemption on Sale of Land or Building

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:

  1. The Cost of NHAI/REC Bonds,
  2. 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:

  1. Any assessee can claim exemption u/s 54EC. Therefore, an Individual, HUF, Company, LLP, Firm, etc can claim this exemption
  2. 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.
  3. The taxpayer invests Capital Gains within 6 months from the date of transfer
  4. 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.
  5. The investment amount can not be more than INR 50 lakhs during the current and succeeding financial year.
From FY 2018-19, Investment in NHAI/REC bonds are redeemable after 5 years as against earlier 3 years as per Budget 2018.
Tip
From FY 2018-19, Investment in NHAI/REC bonds are redeemable after 5 years as against earlier 3 years as per Budget 2018.

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:

  1. The Cost of NHAI/REC Bonds
  2. The Capital Gains on the sale of land or building
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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
Refer Index Cost from here.
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
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Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
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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

Can I invest in Capital Gains Account Scheme (CGAS) and claim exemption u/s 54EC?

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.

Can NRI Claim exemption u/s 54EC?

Yes, NRI can claim exemption u/s 54EC of the Income Tax Act. Provided the land or building sold is situated in India.

What will be the tax rate on capital gains earned if exemption u/s 54EC is not claimed?

LTCA are taxed at special rates. Land and Building are considered movable assets and taxed at 20% with Indexation.

Got Questions? Ask Away!

  1. Hey @TanyaChopra

    To claim Capital Gains Exemption under Section 54EC, you need to file ITR-2.

    Read more about Section 54EC here

  2. Details are as follow:

    • Commercial Plot is purchased through joint names (father and me), construction cost paid through cash.
    • Plot booked in 2019, Sale process started in 2022 [about 35% received via biana within a week ago, remaining 65% payment to be received within 2 months as per mutual agreement]
    • Plot’s Basic Sale Price = Rs. 33L; however, overall including EDC and Delayed Interest, up to Rs. 34L
    • Sale amount = Rs. 50L
    • I do not own any house, live under mother’s rental lease agreement, currently.
    • I’m a salaried employee under private company.

    My queries/confusion:

    1. Cost Inflation Index FY based on possession date (not booking date) as entry date and sale transferred (not biana date) as exit date, right?

    2. Since it is a jointly held, I did not pay anything to acquire the commercial plot but father did. Now when we sell, 50% will be to each account, what would be my LTCG?

    3. Please correct me if I’m missing something for my LTCG (>24 mo.):
      (+) Sale Consideration: Rs. 25L (half of 50L overall joint)
      (-) Transfer Expenses: Rs. 0 (constructed via cash not eligible, right?)
      (-) Indexed Cost of Acquisition: 16.5L * 317/289 = 18.1L
      (-) Indexed Cost of Improvement: ?? (what exactly is this?)
      Long-Term Capital Gain: 6.9L

    4. If possession date and sale date is 24+ months , can I save LTCG tax by just investing Rs. 6.9L in IRFC/NHAI/PFC/IRFC bond under Section 54EC?

    5. If yes, can I keep 18.1L in my bank account or invest in FD / MF? Any further suggestion?

  3. Hey @learner

    1. Indexed Cost of Acquisition is calculated as Cost of Acquisition * CII for Sale Year/ CII for Purchase Year. In your case, CII for Sale Year would be CII of the year in which you sold property. CII for Purchase Year would be CII of the year in which you got the possession of property.

    2. If you have not contributed towards the purchase consideration, you will not be treated as a co-owner for income tax purpose. Thus, the entire LTCG would be taxed in the ITR of your father as Sale Value - Transfer Expenses - Indexed Cost of Acquisition

    3. Cost of Improvement is a capital expenditure incurred by an assessee for making improvement in the property. It can be claimed as a deduction for computing capital gains. Indexed Cost of Improvement is calculated as Cost of Improvement * CII of year of sale / CII of year of improvement

    4. If the period of holding is more than 24 months, income is treated as LTCG. You can claim exemption under Section 54EC if you fulfill all the conditions as per the Section. Read more about it here

    1. With the remaining sale proceeds, if you keep them in bank account, you will earn Savings Interest, if you invest in FD, you will earn FD Interest, You can look for other investment options where you earn income and also gain tax benefit such as ELSS, PPF, NSC, etc. Read more about it here
  4. Thanks a lot @Sakshi_Shah1 for the detailed answer and @Amulya_Garg for ensuring my queries addressed.

    I do have a follow-up queries.

    1. Since the tax is under hand of my father as he only purchased the commercial plot, can I enjoy 50% of sale proceeds that is credited to my bank account without any tax? “Enjoy” in my term refer to Multi-Option-Deposit (Bank) with quarterly payout.

    2. My father has purchased another commercial plot, do you have any relevant article that explains how tax can be saved by utilizing the sale proceeds to buy another commercial plot (before or after)?

  5. Hello @learner

    1. Ideally, since your father is the owner of the property, the sale proceeds should be credited to his bank account. If the money has already been credited to your account, there are chances that the Assessing Officer i.e. AO might question the source of funds and a justification why they are not reported as income in the ITR.

    2. Capital Gains on sale of commercial plot can be exempt if the taxpayer invests in any of the following assets:

    • Section 54EC - Buying bonds of NHAI, REC, etc
    • Section 54EE - Buying units of fund notified by Central Government to finance start-ups
    • Section 54F - Buying residential house property
  6. The registration of commercial property comes under both father and my name (co-owners), which is how sale proceeds is credited to each of us, however, all the payments for purchase of property were done by father only. And my father will report the whole capital gains in his account.

    Will this below stands true in my ITR if I do not report?

    And thanks for 2nd point.

  7. Hey @learner

    Your father should report the capital gains in his ITR. You need not report the same in your ITR. However, you must hold relevant proofs of the capital gains taxed in your father’s ITR in case the AO questions source of funds in your account.

  8. The income tax department introduced a new Section 54EE of Income Tax Act with effect from 1st April 2017. Section 54EE provides for exemption from Capital Gains Tax on the sale of any long-term capital asset by investing into units of specified funds.

    A taxpayer can claim an exemption u/s 54EE if they fulfill all the below conditions:

    1. Any assessee i.e. Individual, HUF, Company, LLP, Firm, etc can claim an exemption under Section 54EE.
    2. The asset sold is any Long Term Capital Asset (LTCA).
    3. The taxpayer invests Capital Gains within 6 months from the date of transfer of the original asset.
    4. Taxpayer invests in units of funds notified by the Central Government on or before 1st April 2019 to finance startups.
    5. The investment amount can not be more than INR 50 lakhs during any financial year.
    6. The investment amount can not be more than INR 50 lakhs during the current and succeeding financial year.

    You can read more about Section 54EE here.

    Got questions? Shoot’em here.

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