Capital gain not to be charged on investment in certain bonds.
Updated: Sep 30, 2022
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Introduction
Section 54EC allows for tax deductions of capital gains after the transfer of original or long-term capital assets. There is a specific set of criteria that has to be met in order to be eligible for the deductions and benefits of Section 54EC. Taxpayers or assesses who acquire capital gains can avail of tax deductions under Section 54EC of the Income Tax Act 1961. This section allows taxpayers to save on tax on any capital gains or profits that they might accrue following the transfer of one or more long-term or original capital assets.
Application of Section 54EC Taxpayers can only avail of the benefits and deductions provided by Section 54EC if the following criteria have been satisfied:
The asset that has been transferred by the assessee must be a long-term capital asset, and the transfer of such an asset should result in long-term capital gains or profits.
The transfer of the long-term capital asset in question should have taken place post April 1st 2000
The capital gains or profits received by the assessee from the transfer of the long-term capital asset, either completely or partially, must be invested in the long-term specified asset
These long-term specified assets are any of the following:
Bonds issued by the National Bank of Agriculture and Rural Development (NABARD), which are redeemable following the completion of three years
Bonds issued by the Small Industries Development Bank of India (SIDBI), which are redeemable following the completion of three years
Bonds issued by the National Highways Authority of India (NHAI), which are redeemable following the completion of three years
Bonds issued by the National Housing Bank, which are redeemable following the completion of three years
Bonds issued by the Rural Electrification Corporation Ltd (REC), are redeemable following the completion of three years
The investment in the long-term specified asset takes place within a duration of six months following the date of the transfer of the long-term or original asset
As per the provisions outlined in Section 54EC(1), any investment that the assessee has made over the course of any financial year, must not be more than Rs 50 lakh
The assessee will not be able to claim tax deductions under Section 80C, should any investment of capital gains be made in the bonds mentioned previously.
Tax Deductions Under Section 54EC Based on Amount Invested
The assessee can avail of tax deductions under 54EC depending on the number of capital gains he or she has invested. This can be explained in the following way:
Full Investment - Should the assessee fulfill or meet the conditions or criteria mentioned above, then the assessee will be eligible to avail of tax deductions of the full amount of the capital gains or profits provided the complete amount accrued by the assessee is invested in the specified long-term asset.
Partial Investment - Should the assessee fulfill or meet the conditions or criteria mentioned above, but only a partial amount of the capital gains accrued by the assessee is invested in the specified long-term asset, then the assessee can only claim deductions up to a proportionally similar amount to the amount he or she has invested.
Illustrations of Deduction Under Section 54EC An assessee can only claim deductions or exemption under Section 54EC up to the number of capital gains that he/she has invested in the long-term specified asset provided that the investment has taken place prior to the completion of six months from the asset transfer date. Full Investment Illustration: If an assessee has accrued capital gains of Rs 15 lakh on the transfer of assets and has invested the entire amount of Rs 15 lakh in bonds mentioned under Section 54EC, then the entire amount invested will be exempt from tax. Partial Investment Illustration: If an assessee has accrued capital gains of Rs 15 lakh on the transfer of assets and has invested a partial amount of Rs 10 lakhs in bonds mentioned under Section 54EC, then only the amount of Rs 10 lakh will be exempt from tax, while the assessee will be liable to pay tax on the remaining amount of Rs 5 lakh
Maximum Limit Permitted Under Section 54EC As per the provisions outlined under Section 54EC, the maximum amount of investment that an assessee can make in long-term specified assets or bonds mentioned under Section 54EC, cannot be more than Rs 50 lakh over the duration of a financial year. However, it should be noted that the period of six months from the date of the transfer of the asset, during which the capital gains investment must be made, cannot include any portion of the following financial year. This can be further explained by the following illustration: If Mr. X has accrued capital gains to the amount of Rs 1 crore as of 1 January 2014, he will not be eligible to claim exemption on this amount under Section 54EC should he make an investment of Rs 50 lakhs in long-term specified assets prior to March 31st, 2014, nor will he be able to claim an exemption under Section 54EC should he make an investment of Rs 50 lakh in long-term specified assets after March 31st, 2014, by stating that both investments have been made in two different financial years.
Lock-In Period Specified Under Section 54EC As per the provisions outlined under Section 54EC, the following conditions apply with regard to the lock-in period of any capital gain investment:
Should an assessee invest in any of the bonds specified under Section 54EC, then these bonds are not eligible to be either transferred or redeemed for cash prior to the completion of three years from the date they were acquired. In other words, a lock in period of three years will be applicable for such bonds.
Should these bonds be either transferred or redeemed for cash, then the capital gain amount invested by the assessee in these bonds will not long be eligible for exemption under Section 54EC, and will be considered as long-term capital gain acquired during the year prior to the transfer or redemption of such bonds.
Should the assessee opt to take out a loan on the bond’s security, then this act will be considered to be a conversion of the long-term specified asset into cash on the same date that the loan was acquired
Amended Section 54EC as per Budget 2019 Announcements
In Budget 2019, the government has made some key announcements designed to amend the original Section 54EC of the Income Tax Act, 1961. These amendments will come into effect from April 1, 2019. Some of the key amendments are as follows:
In sub-section 1, now the term long-term capital assets mean building or land or both
In sub-section2, right before the ‘Explanation’, the following proviso shall be mentioned – “Provided that in case of long-term specified asset referred to in sub-clause (ii) of clause (ba) of the Explanation occurring after sub-section (3), this subsection shall have effect as if for the words “three years”, the words “five years” had been substituted”
In the ‘Explanation’ after the sub-section 3 for the clause “(ba)”, the below shall be substituted:
‘(ba)’, long-term specified assets for making any sort of investment under this section:
On or after April 1, 2007, but before April 1, 2018, means bonds redeemable after 3 years and issued on or after April 1, 2007, but before April 1, 2018
On or after April 1, 2018, means any bond which is redeemable after 5 years and issued on or after April 1, 2018, by the National Highway Authority of India (NHAI) constituted under Section 3 of the NHAI Act, 1988 and 68 of the Act 1988 or by the Rural Electrification Corporation Ltd., a company established and registered under the extant rules of the Companies Act 1956 or any other type of bond reported in the Official Gazette by the Central Government.
After these amendments, the following are some of the salient features of Section 54EC:
The asset being transferred (sold) is either land/building or a combination of the two which has been held for the long term i.e. over 3 years.
The gains from such capital assets will be tax-free as long as the investment is made in specified assets within 6 months from the date of transfer of the asset.
The only other type of long-term assets apart from land and building for which this tax benefit can be claimed are bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation Limited. The holding period for these bonds to qualify as long-term assets is 3 years for bonds issued on/after April 1, 2018, and 5 years for these bonds, if issued on/after April 1, 2018.
Exemption Amount Available Under Section 54EC
Exemptions available under this section are available up to the extent of capital gains invested in the specified long-term capital assets. The maximum limit for this tax benefit u/s 54EC is Rs. 50 lakh as of FY 2019-20.