Capital Gains Exemption – Section 54EC

CA Aditya Bellur

As we all are aware that whenever the topic of exemption against capital gains initiated, Section 54EC is one of the confusing section amongst other exemptions. This is main reason why today I will try to discussed it in details for better understanding:

Extract of Section 54EC:

Capital gain not to be charged on investment in certain bonds.

54EC. (1) Where the capital gain arises from the transfer of a long-term capital asset, being land or building or both, (the capital asset so transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—

(a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45;

(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under section 45 :

Provided that the investment made on or after the 1st day of April, 2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees :

Provided further that the investment made by an assessee in the long-term specified asset, from capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.

(2) Where the long-term specified asset is transferred or converted (otherwise than by transfer) into money at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such long-term specified asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head “Capital gains” relating to long-term capital asset of the previous year in which the long-term specified asset is transferred or converted (otherwise than by transfer) into money:

Provided that in case of long-term specified asset referred to in sub-clause (ii) of clause (ba) of the Explanation occurring after sub-section (3), this sub-section shall have effect as if for the words “three years”, the words “five years” had been substituted.

Explanation.—In a case where the original asset is transferred and the assessee invests the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have converted (otherwise than by transfer) such specified asset into money on the date on which such loan or advance is taken.

(3) Where the cost of the long-term specified asset has been taken into account for the purposes of clause (a) or clause (b) of sub-section (1),—

(a)  a deduction from the amount of income-tax with reference to such cost shall not be allowed under section 88 for any assessment year ending before the 1st day of April, 2006;

(b) a deduction from the income with reference to such cost shall not be allowed under section 80C for any assessment year beginning on or after the 1st day of April, 2006.

Explanation.—For the purposes of this section,—

(a)  “cost”, in relation to any long-term specified asset, means the amount invested in such specified asset out of capital gains received or accruing as a result of the transfer of the original asset;

(b)  “long-term specified asset” for making any investment under this section during the period commencing from the 1st day of April, 2006 and ending with the 31st day of March, 2007, means any bond, redeemable after three years and issued on or after the 1st day of April, 2006, but on or before the 31st day of March, 2007,—

 (i)   by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988); or

 (ii)  by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956),

and notified by the Central Government in the Official Gazette for the purposes of this section with such conditions (including the condition for providing a limit on the amount of investment by an assessee in such bond) as it thinks fit:

Provided that where any bond has been notified before the 1st day of April, 2007, subject to the conditions specified in the notification, by the Central Government in the Official Gazette under the provisions of clause (b) as they stood immediately before their amendment by the Finance Act, 2007, such bond shall be deemed to be a bond notified under this clause;

(ba) “long-term specified asset” for making any investment under this section,—

 (i)  on or after the 1st day of April, 2007 but before the 1st day of April, 2018, means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 but before the 1st day of April, 2018;

 (ii)  on or after the 1st day of April, 2018, means any bond, redeemable after five years and issued on or after the 1st day of April, 2018,

by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956) or any other bond notified in the Official Gazette by the Central Government in this behalf.

The provisions of section 54EC are explained herein below

1. All categories of persons are eligible to avail exemption benefit under section 54EC of the Income Tax Act.

2. Section 54EC exemption is available only towards the capital gain arisen on account of transfer of long term capital asset (being land or building or both).

3. The assessee has invested the amount of capital gain (wholly or partly) in the long term specified assets.

4. The amount should be invested within a period of 6 months from the date of transfer.

5. The investment in the long term specified assets by an assessee during the Financial Year cannot exceed INR 50 Lakhs.

6. The investment in the long term specified assets by an assessee (from the capital gain arising from the transfer of one or more land or building or both) cannot exceed INR 50 Lakhs during the financial year in which the land or building or both is transferred and in the subsequent financial year.

7. “Long-term specified asset” for making any investment u/s 54EC means any bond redeemable after five years and issued by National Highways Authority of India (NHAI) or by Rural Electrification Corporation Limited or any other bond notified by central government. Finance Act 2018 has extended the time period to 5 years , earlier it was 3 years only.

Note:

Explanation (ba) of section 54EC (made effective from 1st April 2019) explains the term ‘Long Term Specified Asset’. The same means as under –

(i)  On or after 1st April 2007 but before 1st April 2018:

The bonds issued on or after 1st April 2007 but before 1st April 2018 by –

1. National Highway Authority of India.

2. Rural Electrification Corporation Limited.

3. Any other bond as notified in the official gazette. We observed that till now CBDT has notified following Bonds for the purpose of Section 54EC Exemption-

a. Bonds issued by Power Finance Corporation Limited (PFC) – Notified by CBDT vide Notification No. 47/2017 Dated: 08.06.2017

b. Tax savings bonds issued by Indian Railway Finance Corporation Limited – Notified by CBDT vide Notification No. 79/2017 Dated: 8^th August, 2017

The bonds should be redeemable after 3 years.

(ii)  On or after 1st April 2018

The bonds issued on or after 1st April 2018 by –

1. National Highway Authority of India.

2. Rural Electrification Corporation Limited.

3. Any other bond as notified in the official gazette. We observed that till now CBDT has notified following Bonds for the purpose of Section 54EC Exemption-

a. Bonds issued by Power Finance Corporation Limited (PFC) – Notified by CBDT vide Notification No. 47/2017 Dated: 08.06.2017

b. Tax savings bonds issued by Indian Railway Finance Corporation Limited – Notified by CBDT vide Notification No. 79/2017 Dated: 8^th August, 2017

The bonds should be redeemable after 5 years.

Amount of exemption available under section 54EC of the Income Tax Act

The amount of exemption allowable under section 54EC is lower of the following –

• Amount of capital gain invested in the long term specified assets; or
• INR 50 Lakhs

Example for Better Understanding

Mr. ABC purchase a house property on 01.04.2002 for Rs 5,00,000. He sells the house on 15.11.2019 for Rs 2,00,00,000. He purchases bonds of NHAI which are redeemable after 5 Years as under: –

(i) On 15.03.2020  – Rs 50,00,000 (FY 2019-20)

(ii) On 15.04.2020 – Rs 50,00,000 (FY 2020-21)

In the above example, The capital gain for Assessment Year 2020-21 shall be as under :

Period of Holding (2002 to 2019) : Long-term

As shown in example, assessee has tried to take double benefit of section 54EC by investing the amount in two different financial years but within six month after the date of transfer. But this planning is nullified by the Second Proviso u/s 54EC.

Withdrawal of Section 54EC exemption

The exemption claimed under section 54EC would be withdrawn, in case the long term specified asset is transferred or converted into the money before the expiry of the period of three years or five years, as the case may be.

In case of transfer / conversion, the amount of exemption claimed under section 54EC shall be deemed to be income under ‘Capital Gains’ as long term capital gain in the previous year in which the long term specified asset is transferred or converted.

It important to noted here that in case the assessee has taken any loan or advances against the long term specified asset, then, the same would be deemed as converted into money on the date on which such loan or advances is taken.

Article contributed by CA Aditya Bellur, Chartered Accountant.

Email  – [email protected]

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(Republished with Amendments by Team Taxguru)