When you sell a long-term capital asset, such as some land, building or securities, etc., the overall profits you have earned are taxed as long-term capital gains. However, the Indian Income Tax Act offers various types of exemptions that permit taxpayers to save on this liability if the gains are reinvested in specific pathways. One of the most prominent and preferred exemptions is Section 54EC, which grants the relief if the gains are reinvested in certain notified bonds.
But the most common question that arises is: Who can actually claim a 54EC exemption? This blog will explore in detail the eligibility, conditions and nuances of claiming this benefit.
Understanding Section 54EC
Before diving into who can claim the exemption, it’s important to understand the essence of Section 54EC.
- Applicability: This section offers various types of exemptions on the long-term capital gains that arise from the sale of a long-term capital asset, or value, being a land or building (residential, commercial or any other industrial property).
- Condition: The gains must be invested in some specified bonds which are issued by certain government-aided institutions such as the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC) or the Indian Railway Finance Corporation (IRFC).
- Lock-in period: These bonds come with a mandatory lock-in of 5 years (earlier it was 3 years).
- Investment limit: A maximum of ₹50 lakhs can be invested in these bonds in a financial year.
Who Can Claim a 54EC Exemption?
Section 54EC is fairly inclusive. The exemption is available to all categories of taxpayers, provided they fulfil the conditions prescribed. Let’s break this down.
1. Individuals
Both resident and non-resident individuals can claim exemption under Section 54EC. For example, if you sell a residential flat and earn the long-term capital gains, then you can easily invest the gains in the specified bonds within the prescribed time and claim the provided tax exemption.
- Resident Individuals: Any resident individual who sells land or a building can avail of this exemption.
- Non-Resident Indians (NRIs): The NRIs are also eligible. For example, if an NRI sells the property in India and invests the gains in NHAI or REC bonds, then they can easily claim exemption under the provided section.
2. Hindu Undivided Families (HUFs)
A Hindu Undivided Family is treated as a separate taxable entity under the Income Tax Act. HUFs can also easily claim the 54EC exemption when they sell their long-term capital asset (land or building) and then reinvest the gains in specified bonds.
3. Companies
Companies that sell land or buildings and earn long-term capital gains can also claim exemption under Section 54EC by investing the gains in the notified bonds. This applies whether the company is private, public or even a closely-held entity.
4. Partnership Firms & LLPs
Partnership firms and Limited Liability Partnerships (LLPs) are also eligible to claim exemption under this section. If a firm sells land or a building and reinvests the gains, the exemption is available.
5. Other Taxpayers
Trusts, associations of persons (AOPs), and body of individuals (BOIs) can also benefit from Section 54EC exemption, provided they satisfy the conditions of investment.
Key Conditions for Claiming Section 54EC
1. Nature of Asset
The exemption applies only when the capital gain occurs from the transfer of a long-term capital asset, being land or a building, or both. Various other types of assets, such as shares, gold or movable property, are not covered under the exemption.
2. Period of Holding
The property sold should be classified as a long-term capital asset. That means:
- For immovable property like land and buildings, it should be held for at least 24 months before sale (as per current rules).
3. Time Limit for Investment
The capital gains must be invested in the specified type of bonds within a period of 6 months from the date of the transfer of the particular asset. To miss the prescribed deadline will make you ineligible for the purpose of exemption.
4. Maximum Investment Limit
The maximum exemption available is limited to ₹50 lakhs in a financial year. Even if your capital gains exceed ₹50 lakhs, you can only claim exemption up to this limit.
5. Lock-in Perio
The bonds have a lock-in of 5 years. If you sell or transfer them before this period, the exemption claimed earlier will be withdrawn and taxed in the year of transfer.
6. One-Time Investment Rule
You can invest in these bonds once for a particular transfer. You cannot stagger investments over multiple years for the same transfer.
Practical Points to Remember
- Capital Gain Account Scheme not applicable: Unlike Section 54 or 54F, if you are unable to invest before the due date of return filing, you cannot park the money in the Capital Gains Account Scheme for Section 54EC. The 6-month investment deadline is strict.
- Transfer vs. Sale: The exemption applies not only to sales but also to any form of the “transfer” as defined under the Income Tax Act, such as exchange or compulsory acquisition.
- Taxability on Premature Sale of Bonds: If the bonds are sold before 5 years, the exemption claimed will be withdrawn and taxed as LTCG in the year of sale.
Conclusion
Section 54EC is one of the most credible ways to save taxes on long-term capital gains that arise from the sale of land or buildings. The good part about this is that it is not restricted to the particular individuals alone, rather it can be claimed by all categories of the taxpayers, such as HUFs, companies, firms and even trusts as well.
You need to strictly follow the given conditions: –
- The asset sold must be land or a building.
- Investment must be made in specified bonds.
- The maximum exemption is ₹50 lakhs.
- The investment should be made within a period of 6 months and held for at least 5 years.
With the help of carefully planning all your investments, you can significantly minimise or even eradicate your tax burden on the long-term capital gains.
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