Section 54EC of Income Tax Act 1961 – Decoded!

Section 54EC of Income Tax Act 1961 provides for tax exemption on capital gains from sale of any Long Term Asset (original asset) provided that capital gains are invested in specified bonds (new asset) within a period of 6 months after the date of transfer of original asset.

For the purpose of Section 54EC:

Original Asset – Any long term asset such as Stocks, Bonds, Gold, Land, House Property etc. that is sold after 3 years from its date of acquisition.

New Asset (Specified Asset) – Specified Bonds, redeemable after 3 years, such as those issued by National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC).

Exemption Amount under section 54EC of Income Tax Act 1961

Under Section 54EC of Income Tax Act, you can claim tax exemption on capital gain upto the extent it is invested in the purchase specified asset. This can be elaborated further as follows:

  • If Capital Gain < Cost of Long Term Specified Asset, then entire Capital Gain Amount is exempted, and
  • If Capital Gain > Cost of Long Term Specified Asset, then you can claim exemption upto the cost of specified asset.

Provided that the total investment made on or after 1 April 2007 in specified asset in the financial year in which original asset was sold and the subsequent financial year, does not exceed Rs. 50 lakh.

No Exemption under Section 54EC

You will not be able to claim tax exemption under section 54EC of Income Tax Act 1961, if you sell the specified asset, take a loan against it or convert the specified asset into money by any means within 3 years from the date of its acquisition.

section-54ec-of-income-tax-act-1961

Some Facts about Specified Bonds

  • Face value of specified bonds issued by NHAI and REC is Rs. 10,000 and full investment amount has to be paid upfront.
  • Specified Bonds can be held in single name or joint names. In case, the original asset was owned in joint names, you can invest upto Rs. 50 lakh each in such bonds separately.
  • These specified bonds are non-transferable, non-negotiable and cannot be offered as security for any loan or advance.
  • Interest payable on these bonds is 6% per annum and is taxable.
  • Maturity of bonds is 3 years from deemed date of allotment.

Latest Amendment to Section 54EC with illustration

Prior to Financial Year 2014-15, people were able to increase their tax exemption by investing in specified bonds in the financial year in which the original asset was sold and subsequent financial year. For example, if the sale of original asset was registered in later half of the year, say November, one investment of Rs. 50 lakhs was made before March 31 and another in April. This way it was possible to claim exemption upto Rs. 1 Crore, which would not be possible now.

As per latest amendment to section 54EC, issued in Budget 2014, tax exemption on capital gain under section 54EC will be available on total investment made in the financial year in which original asset was transferred and the subsequent financial year upto Rs. 50 lakhs.

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Team AY is the editorial team of AssetYogi led by Mukul Malik. A small group of Real Estate enthusiasts, Team AY works hard everyday on a vision of making high quality Real Estate knowledge freely available.

2 comments

  1. Is it possible to sell the property in installments in two separate financial years and split the gain to reduce tax?

  2. Is it possible to put the bonds in joint name with another person, if they were not involved in the sale of the property ? I would like to put my sister in laws name on the bonds.

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