Understanding Section 54EC of Income Tax Act - Capital gain exemption on investment in specified bonds

Making a profit on selling capital assets is great, but do you know you have to pay taxes on that money?

But there’s a not-so-secret way to avoid paying those taxes. It involves reinvesting your capital gains into capital gains bonds under Section 54EC of the Income Tax Act.

In this guide, we’ll discover how Section 54EC can help you save money on taxes and make the most of your profits.

What is Section 54EC?

Section 54EC is a provision under the Indian Income Tax Act that offers taxpayers a chance to avoid paying capital gains tax.

How?

When an individual sells a long-term property and decides to reinvest the profits in specific capital gains bonds. Then, they can claim tax deductions under Section 54EC.

But wait! Is everyone eligible to claim this exemption? Read on to find out!

Who Is Eligible To Claim Exemption Under Section 54EC?

The eligibility criteria for claiming an exemption under Section 54EC extends to the below entities.

➔    Individuals, Hindu Undivided Families (HUFs), companies, LLPs, and firms.

➔    The reinvestment must be made in specific 54EC bonds issued by organizations like NHAI, REC, PFC, or IRFC.

➔    The total investment sum during the current and subsequent financial years must not exceed Rs.50 lakhs.

➔    The Capital Gains must be reinvested within six months from the date of the asset's transfer.

➔    The exemption only applies to a Long-Term Capital Asset, such as land or buildings, held for at least 24 months before the sale.

What is a Capital Asset?

Capital assets typically refer to any valuable property or investment, including a house, land, car, stocks, furniture, jewelry, etc. These are of two types:

●       Short-term Capital Assets

●       Long-term Capital Assets

To learn more about the types, click here.

Which Bonds Are Eligible For Exemption Under Section 54EC?

●       REC bonds (Rural Electrification Corporation Limited)

●       NHAI bonds (National Highway Authority of India)

●       PFC bonds (Power Finance Corporation Limited)

●       IRFC bonds (Indian Railway Finance Corporation Limited)

Key Takeaways For Section 54EC Bonds Exemption

●       You must invest in specified bonds within six months of selling your property.

●       The invested amount cannot be withdrawn before a lock-in period of five years. Before April 2018, it was three years.

●       The exemption applies only to long-term capital gains from selling immovable property like land or buildings.

●       The maximum amount on which tax exemption can be claimed is 50 Lakh.

How Is Tax Exemption Calculated Under Section 54EC?

Here's a breakdown of calculating tax exemption under Section 54EC of the Income Tax Act.

Let's consider a land is sold for ₹80,00,000 with an indexed cost of acquisition at

₹47,00,000 and an indexed cost of improvement at ₹12,00,000.

Case 1: Investment of Rs. 21 lakhs in REC bonds within six months

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

Important: It's essential to note that if the capital gains bonds are sold before maturity, the exempted amount becomes taxable as a long-term capital gain in the year of conversion.

If you want to save on capital gains tax and need assistance, consider consulting KarrTax tax experts.

Step-by-Step Procedure To Invest In Capital Bonds

1)     Go to the official bond issuer (REC, NHAI, PFC, IRFC) website and click on the direct option.

2)     Fill in a simple security check and download the forms in ZIP format.

3)     Unzip the file and print out the forms.

4)     Take the filled-out forms along with a demand draft or an account payee check to designated banks for submission. These banks typically include Axis Bank, HDFC Bank, State Bank of India, IDBI Bank, and IndusInd Bank, among others.

5)     Also, you can transfer the investment money directly into a designated account using NEFT/RTGS. All you need to do is fill out the online forms on the website and include the UTR number provided during the transaction.

Frequently Asked Questions (FAQs)

1.    Are NRIs eligible to claim an exemption under Section 54EC?

Absolutely! NRIs can claim an exemption under Section 54EC if capital gains arise from the sale of assets located in India.

2.    What are the specified bonds under Section 54EC?

Specified bonds include the ones issued by

●       REC (Rural Electrification Corporation Limited)

●       NHAI (National Highway Authority of India)

●       PFC (Power Finance Corporation Limited)

●       IRFC (Indian Railway Finance Corporation Limited)

3.    What happens if I invest in capital gain bonds after six months?

If you miss the six-month deadline, it will become mandatory to pay taxes on those gains. So, it's best to keep track and invest within the six-month window from the sale of assets.

4.    What is the tenure of 54EC bonds, and are these transferable?

Section 54EC bonds typically have a tenure of five years and are non-transferable.

5.    Can I claim tax deductions on capital gains exceeding Rs. 50 lakh in a financial year?

No! According to Section 54EC of the Income Tax Act, the maximum amount of capital gains eligible for tax exemptions or deductions in a financial year is Rs. 50 lakh. The remaining amount above Rs. 50 lakh will be fully taxable.

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