The benefit under section 54EC can be availed of only if there is an income from a capital asset, being  long-term in nature. Long-term capital gains are the profit that a person makes when he sells any capital asset (wef A.Y 2019-20, the said long term capital asset shall be land or building or both) which he has held for a period exceeding 24 months. An exception is his holding of shares in which the holding period has been fixed at one year.

Any person (including NRI out of NRO account on a non-repatriable basis) and Hindu undivided family (HUF), through its Karta, can make investments (not exceeding Rs 50 lakh in a given financial year) in the two bonds notified by the Government of India. In case only part investment is made, the amount of deduction gets reduced in proportion to the investment.

The assesse should within a period of 6 months from the date of transfer invest the gains in  Long Term specified bonds as issued by NHAI and REC and notified by the Central Govt (bond issued by power finance corp/Indian Railway Finace Corp). for a minimum period of 3 years (5 years if such bonds are issued on or after 01.04.2018)

In cases where the assesse converts the specified asset into cash, or takes a loan or advance on the security of such specified asset within a period of 3 years (5 years if the investment is made in specified asset on or after 01.04.2018) from the date of its acquisition, the amount of Capital Gain exempt u/s 54EC shall be deemed to be Long Term Capital Gain of the previous year in which the Long Term Capital Asset is transferred or converted into money or on the date such loan or advance is taken.

 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. Capital gain shall be exempt to the extent of amount of investment in such specified bonds upto a maximum of Rs.50 Lacs.

These bonds carry a lower rate of interest as compared to other investment options, such as Public Provident Fund, bank fixed deposits and National Savings Certificates, among others. The main reason for this lower rate of interest is that the investor gets the benefit of reducing his income tax liability upon investing in these bonds, if he has long-term capital gains. These bonds are issued for a fixed maturity period of three years. These bonds have been rated as “AAA/Stable” by Credit Rating and Information Services of India (CRISIL).

The investment has to be made within six months from the date of the transfer in order to be eligible for claiming the benefit of deduction under section 54EC. The face value of these bonds is Rs 10,000, and the full amount has to be paid upfront along with the application.

The deemed date of allotment is the last date of the month in which the application is made and the amount is realised by the issuer.

These bonds can be held in dematerialised form or in physical form. The bonds can be held under a single name or joint names. The facility for nomination is also available on these bonds. These bonds are non-transferable, non-negotiable and cannot be offered as security for any loan or advance. However, transmission of the bonds to legal heirs in case of death of the bondholder is allowed under the rules.

The NHAI and REC bonds carry interest at 5.75 per cent per annum, payable annually wef 01.04.2018. The interest earned on these bonds is fully taxable under the head “Income from Other Sources”. No tax at source would be deducted from the interest on these bonds.

Also Read:

Brief Synopsis of Capital Gain Exemption u/s 54, 54EC & 54F

All about Section 54, 54B, 54D, 54F, 54GA, 54EC, 54G & 54GB

Exemption under Section 54, 54EC & 54F -FAQs & case laws

(Republished with amendments.)

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88 responses to “Tax benefit under section 54EC on long term capital gain”

  1. CA Geetaa Guwalanii says:

    54EC deduction allowed if investment within six months of transfer. There is no restriction regarding investment to be made before the due date of ITR or deposit of amount in specified Capital Gain account..Am i right?

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