When you sell a long-term capital asset (think land or property), you usually owe taxes on the gains. However, specific sections of the IT Act offer exemptions for capital gains when you reinvest those in designated bonds or assets. One popular option is Section 54EC , which allows taxpayers to reduce their tax liability on long-term capital gains under certain conditions.
What is section 54EC?
When you sell a long-term immovable property, like land or a building, Section 54EC allows you to claim an exemption if you invest in specific bonds known as Section 54EC bonds or Capital gain bonds. These bonds are fixed-income investments that let you reinvest your capital gains from property sales and claim tax relief.
Below are a few conditions that must be met:
- The asset being sold must be land or a building (or both).
- The asset must be a long-term asset, i.e. must be held for at least 24 months.
- Taxpayer must invest in specified bonds within 6 months from the date of the sale of an asset.
- The investment should be made in specified 54EC bonds, including those issued by NHAI, REC, PFC, or IRFC.
- The total investment amount cannot exceed INR 50 lakhs during the current financial year and the subsequent financial year.
These bonds are government-backed and thus come at a lower risk. However, these are not listed bonds, and the interest earned on these bonds is taxable.
Individuals can redeem these bonds before the maturity period. However, there is a lock-in period of 5 years and the exemption claimed under section 54EC would be withdrawn, in case the bond is sold before the expiry of the period of 5 years.
The exemption amount will be the least of,
a) The cost of NHAI/REC Bonds
b) The Capital Gains on the sale of land or building
Let’s understand by an example,
Ajay sold a land in FY 2022-23 for ₹80 lakhs, which was purchased in FY 2017-18 for ₹50 lakhs. Now if he wants to purchase NHAI bonds for ₹40 lakhs in FY 2022-23, he is eligible to claim the exemption u/s 54EC.
The calculation of the exemption is as follows:
Taking inflation into consideration, the cost price will be adjusted, and the indexed cost of acquisition will be taken into account.
Indexed Cost of Acquisition = [Cost Price] * [Cost of Inflation (FY 2022-23) / Cost of Inflation (FY 2017-18)]
Hence, if you are looking for a safe option to invest your capital gains, Section 54EC bonds provide tax-saving benefits and interest earnings while being backed by the government.
Here’s a detailed article on Section 54EC of Income Tax Act on Sale of Land/Building- Learn by Quicko.
Have doubts? Ask away!