Section 54EC of the Income Tax Act

Exemption under section 54EC of the Income Tax Act is available on Capital Gains on sale of any long term capital asset being land or building or both and invested in NHAI or REC Bonds. 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.

A taxpayer can claim this Capital Gains Exemption while filing ITR in that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 10th January 2021.

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Budget 2018 Update

The proposed amendment u/s 54EC in the budget 2018 has inter alia proposed an amendment to Section 54EC. The government has proposed to amend the section by restricting its scope only to capital gains arising from long term capital assets, being land or building, or both. Furthermore, it is also proposed to provide the long term specified asset, for making any investment under the section on or after the 1st day of April 2018 shall mean any bond, redeemable after five years against the earlier three years and issued on or after 1st day of April 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf.

This amendment is to take effect from the 1st of April 2019. It will apply in relation to the AY 2019-20 and subsequent assessment years.

Who can Claim an Exemption Under Section 54EC of the Income Tax Act?

A taxpayer can claim exemption u/s 54EC if all the below conditions are satisfied:

  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 if it has been held for more than 24 months.
  3. Capital Gains are invested within 6 months from the date of transfer.
  4. Investment can be made in 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 Rs. 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.

What is the Amount of Exemption Available Under Section 54EC of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54EC will be 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 2019-20 for Rs. 60,00,000. It was purchased in FY 2013-14 for Rs. 30,00,000. And Jay purchased NHAI bonds for Rs. 45,00,000 in FY 2019-20. 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*289/220) (39,40,909)
Long Term Capital Gains 20,59,091
NHAI Bonds Price 45,00,000
Section 54EC Exemption Amount 20,59,091
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 bonds are sold?

The lock-in period of 5 years is applicable when exemption u/s 54EC of the income tax act is claimed. And the following situations can arise:

Situation 1:

When bonds are sold within 5 years from the date of purchase.

Consequences: The exemption u/s 54EC is withdrawn. And the amount of exemption availed will be reduced from the cost of the asset. And Capital Gains will be the total sales value minus the cost of the asset.

Situation 2:

When bonds are sold after 5 years from the date of purchase.

Consequences: The exemption u/s 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 as 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