We all know that on selling or transferring Capital Assets either long term or Short term, capital gains arise which are taxable in the hands of the taxpayer.
Let’s understand with the help of an example
Mr. Jorden purchased a house for Rs. 50 Lakh in July 2012. The full value of consideration in the financial year of 2018-2019 stood at Rs. 1.8 Crore. The said property was held for over 36 months and was, therefore, deemed as a long-term capital asset.
| Particulars | Amount |
| Sale Consideration | 1,80,00,000 |
| Less: Index Cost of Acquisition (50,00,000*280/200) | 70,00,000 |
| Long Term Capital Gains | 90,00,000 |
If Mr. Jorden does not invest the Capital gains then he is liable to pay Capital Gains Tax on
INR 90
He can save entire capital gains or substantial capital gains by investing in Section 54 EC of Income Tax.
Let’s Understand Section 54 EC
Section 54EC of the Income Tax Act, 1961 says that Long term capital gains are exempt from tax, if invested in NHAI & REC investment instruments within a pre-defined time period.
Key Features of Section 54EC
- Available only in case of sale of long term capital assets being land or building or both.
- Capital Gain are invested within a period of 6 months from the date of sale;
- Investment can be made in the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), or Any Other Bonds notified by the Central Government.
- The investment amount cannot be more than Rs. 50 lakhs during the current and succeeding financial year.
A taxpayer can claim this Capital Gains Exemption while filing ITR in that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 30th November 2020.
Maximum Exemption
The amount of Exemption under Section 54EC will be lower of:
The Cost of NHAI/REC Bonds,
The Capital Gains on the sale of land or building.
Subject to a maximum of INR 50 lacs during the current and succeeding financial year.
Let’s Revisit the illustration again
Mr. Jorden purchased a house for Rs. 50 Lakh in July 2012. The full value of consideration in the financial year of 2018-2019 stood at Rs. 1.8 Crore. The said property was held for over 36 months and was, therefore, deemed as a long-term capital asset.
Mr. Jorden purchased NHAI bonds for Rs. 45,00,000. Jorden will be able to claim deduction under section 54EC as follows:
| Particulars | Amount |
| Sale Consideration | 1,80,00,000 |
| Less: Index Cost of Acquisition (50,00,000*280/200) | 70,00,000 |
| Long Term Capital Gains | 90,00,000 |
| Section 54EC Exemption Amount | 45,00,000 |
What happens to exemption if bonds are sold?
The lock-in period of 5 years is applicable when exemption u/s 54EC of the income tax act is claimed. And the following situations can arise:
Situation 1:
When bonds are sold within 5 years from the date of purchase.
Consequences: The exemption u/s 54EC is withdrawn. And the amount of exemption availed will be reduced from the cost of the asset.
Situation 2:
When bonds are sold after 5 years from the date of purchase.
Consequences: The exemption u/s 54EC is not withdrawn.
FAQ’s
Can NRI Claim exemption u/s 54EC?
Yes.
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