Section 54EC - Exemption on Capital Gains from Land or a Building

Income Tax Income from Capital Gains
1

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 including those issued by NHAI, REC, PFC, or IRFC.

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 However, there is a lock-in period of 5 years and the exemption claimed under section 54EC would be withdrawn, in case the bond is sold before the expiry of the period of 5 years.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)]

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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.

Have doubts? Ask away!

2

as per the recent budget announced : the limit is capped to 10 crores ! what is this regarding ? can u pls clarify ?

3

Hi @HIREiN,

The capital gain exemption limit capped to ₹10 crores is applicable to only section 54 and section 54F.
However, for section 54EC the maximum exemption available is ₹50 lakhs during the financial year.

Hope it helps.

4

Does the long term capital asset denote only sale of land & building or even shares ?

5

Hi @Sachin1

For exemption under section 54EC, the gains should arise from land or building or both, and the gains should be invested in 54EC bonds (such as NHAI, REC, PFC, IRFC, or any other bonds notified by the Central Government) within 6 months from the date of sale of immovable property.

The maximum exemption available under section 54EC is ₹50 lakhs.

6

Hello Slump Sale ( 50 B) includes Land and Building alongwith Machinery etc as a going concern. Is it allowed to claim under the same. The ITR Forms under long term capital gain of slump sale still shows the 54EC. Can you please confirm

7

Hi @Vinay_R,

Yes, you can take exemption under section 54EC on the sale of land or building or both being LTCA, which does not include STCA and from the sale of its proceeds, you purchase bonds of NHAI or REC. If conditions satisfied.

There’s no particular provision mentioned for slum sales u/s 54EC.

8

Thanks , So does that mean Slump sale proceeds ( 50B) can be invested in 50EC.

9

Hi @Vinay_R,

Yes, the Slump Sale proceeds (50B) can be invested in 50EC.

10

2 question
1- Sale of residential house will come under 54 or 54EC?
2- How to invest in capital gain bonds like REC,IRFC etc . Can the whole process be done online?

11

Hi @someguy,

  1. If you sell a residential house property and from its sale proceeds, acquire another residential house property, then section 54 will be applicable, if conditions are satisfied.

  2. If you sell any long-term capital assets and reinvest the profits on specific capital gain bonds like REC, NHAI, etc. then section 54EC is applicable, if conditions are satisfied.

The process can be done online and offline both, here’s the link for REC, PFC, IRFC bonds for your refernce.

12

Hi ,

If there is sale of land executed in 4 separate sale deeds, does the 54EC bonds also have to be executed in 4 separate bonds ? These are different pieces of land each constituting an individual asset. This is with reference to application of the bonds and to make the application process easier.

Thanks

13

Hi @Supraja_Narasimhan

As per your stated situation, it’s not compulsory to purchase 4 separate bonds, irrespective of the number of sale deeds, you can as well invest in a particular bond.

The point is that you can claim the amount of exemption the same as your capital gains, then it is up to you to invest in any number of bonds. Conditions are applicable.

Hope this clarifies.

14

I have three queries:

  1. I have found that in an amendment, Budget 2018 the government has proposed to amend section 54EC by restricting its scope only to capital gains arising from long-term capital assets, being land or building or both.

Does that mean the Capital Gain out of the Slump Sale will not be eligible for 54EC benefits ?

  1. Which of the sections of Section 54EE, 54F, 54EC, and 54GB will be applicable to avail benefit from LTCG tax for slump sale?

  2. If a partnership firm goes for Slump Sale, will it be possible to benefit from any of the sections of Section 54EE, 54F, 54EC, 54GB?

15

Hi @DravidM

Yes, the proceeds from a slump sale can be invested in Section 54EC bonds.

Under the provisions of the Income Tax Act, the benefit of Slump sale is available under sections 54EE, 54F, and 54EC.

  1. Section 54EE: This section provides an exemption from LTCG tax if the capital gains (from slump sale) are reinvested in specified funds within a specified time frame.
  2. Section 54F: This section allows for exemption from LTCG tax if the capital gains (from slump sale) are reinvested in purchasing a residential property.
    This benefit is available if the entire amount of capital gains is invested in a residential property within the specified time frame.
  3. Section 54EC: This section provides an exemption from LTCG tax if the capital gains (from slump sale) are reinvested on specific bonds within 6 months like REC, NHAI, etc.
    Here’s the link for REC , PFC , IRFC bonds for your refernce. These bonds have a lock-in period of three years.

However, in a slump sale, the entire value is considered as a whole and is not separately calculated for land or building.

16

While 54EC bonds can be purchased within six moths of transfer/sale of property, I wonder if these have to be purchased in the same finacial year property is sold. The reason I wonder is that I sold plot on December 12, 2022, invested in 54EC on May 31, 2023. But when I report in Table D of ITR2, date of original transfer 12/12/2022 & date of investment as 31/05/2023, it does not accept the investment date. In fact it doesnt allow any date beyond March 31, 2023. Any suggestion?

17

Hi @kbaliyan

This does not sound right. Please re-try entering the same dates on Quicko or the Utility, it should accept these dates as you have invested within the time frame of 6 months.

18

Thanks Shrutika ji. I appreciate it very much.

Tried several times, and when failed, raised issue with IT department. But as of now no response from it. Date is approaching, dont know what to do.

Regards

Kiran

19

Hi @kbaliyan

You can raise a grievance on the income tax e-filing portal to the ITD regarding the same.

20

Thanks. I did. Waiting for their response- hope it happens before July 31, 2023 !