What is Section 54EC ?

• Section 54EC is applicable when an individual sells his/her long-term immovable property and invests in certain specified capital gains bonds
• Section 54EC of the Income Tax provides taxpayers with an opportunity to avail of an exemption from the capital gains tax.

Bonds Eligible for Exemption under Section 54EC

Bonds Eligible for Exemption under Section 54EC of the Income Tax Act,

• Rural Electrification Corporation Ltd. or REC Bonds.
• NHAI bonds or National Highway Authority of India
• PFC bonds or Power Finance Corporation Ltd.
• Indian Railway Finance Corporation Ltd. or IRFC Bonds

Eligible to Claim Exemption Under Section 54EC

The following are the eligibility criteria to claim the exemption under section 54EC of the Income Tax Act –

• The exemption under section 54EC of the Income Tax Act can be claimed by any taxpayer, whether individual, HUF, LLPs, firms, or companies.
• The exemption is applicable only to the capital gains resulting from the sale of long-term capital assets on the sale of immovable property, including land and/or buildings.
• The taxpayer should invest the capital gains amount in capital gain bonds within six months of the date of transfer.
• The investment has to be made in any of the specified capital gains bonds like REC, NHAI, PFC, or IRFC.
• The total investment amount during the current and next financial years should not be less than Rs.50 lakhs.

Read Also :  7 common mistakes to avoid for a easy income tax filing

How to Invest in Bonds Specified Under Section 54EC

Given below are the steps you need to follow to invest in bonds specified under section 54EC of the Income Tax Act –

• Step 1. Visit the website of the issuer of the specified bonds like REC, NHAI, PFC, IRFC, etc.
• Step 2. Now download the form for the bond in which you want to invest your capital gains. Enter the captcha and click on download.
• Step 3. The respective form gets downloaded in Zip format.
• Step 4. Unzip and extract the form
• Step 5. Fill out the form as per the instructions provided
• Step 6. Either attach a cheque/demand draft and other enclosures of the bank or transfer the amount via RTGS or NEFT to the respective accounts.

Key Features of Capital Gains Bonds Under Section 54EC

54EC bonds allow taxpayers to claim tax exemption on long-term capital gains. Some of its key features are –

• 54EC bonds are safe and secure and AAA-rated.
• Interest on 54EC bonds is subject to tax. There is no TDS deduction on interest received from 54EC bonds, and wealth tax is exempted.
• 54EC bonds are non-transferable and have a lock-in period of 5 years.
• You have to invest a minimum of Rs.10,000 in one bond and a maximum of Rs.50 lakhs in 500 bonds.
• 54EC bonds have an interest rate of 5.25%, payable annually.

Example:

Let’s understand the calculation of tax exemption under section 54EC of the Income Tax Act.
The sale price of a land = Rs.70,00,000
Indexed Cost of Acquisition = Rs.46,00,000
Indexed Cost of Improvement = Rs.10,00,000
Calculate the capital gain taxable after claiming exemption in the below-mentioned cases –

Case-1 : Investment of Rs.14 lakhs in REC bonds within six months
Case-2 :Investment of Rs.8 lakhs in NHAI bonds within six months

Answer:

Case-1:Investment of Rs.14 lakhs in REC bonds within six months

Read Also : Income Tax: Know these 5 key points before filing ITR early

Case-2 :Investment of Rs.8 lakhs in NHAI bonds within six months

If the capital gains bonds are sold before their maturity, the amount of capital gain on which the exemption was claimed will be taxable as long-term capital gain in the year in which it is converted.