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Capital Gain Exemption u/s 54EC

Neethi V. Kannanth 
on 06 April 2021

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Section 54EC of the Income Tax Act,1961, provides for exemption from Capital Gains arising on transfer of a long term capital asset, being a land or building or both.

Applicability

Section 54EC is applicable to all assessees.

Capital Gain Exemption u/s 54EC

Eligibility Criteria

In order to avail exemption under section 54EC of the Income Tax Act, 1961, the following conditions must be satisfied-

  • The asset transferred must be a long term capital asset. It can either be a land or building or both.
  • The assessee has anytime within a period of 6 months from the date of transfer, has made an investment in the long term specified capital assets.
 

Long Term Specified Capital Assets

For the purpose of section 54EC, Long term specified capital assets means any bonds issued by the following-

  • National Highway Authority of India
  • Rural Electrification Corporation Limited
  • Any other as notified by the Central Government in the official gazette along with the limit on the amount of investment
 

Maximum Amount of Investment

The maximum amount of investment made in the long term specified capital asset, on transfer of long term capital asset or assets, during the financial year in which the asset or assets are sold and in the subsequent financial year, shall not exceed Rs. 50 Lakhs.

Quantum of Exemption

The exemption provided shall be the Following

  • 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.For Example – Cost of Specified asset is Rs 50 Lakh and Capital Gain is of Rs 40 Lakh, Whole of Rs 40 Lakh shall not be charged to Capital Gains.
  • 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. For Example- Cost of Specified asset is Rs 50 Lakh and Capital Gain is of Rs 75 Lakh, Rs 50 Lakh shall not be charged to Capital gains and balance Rs 25 lakh shall be chargeable.

Provided the amount of investment does not exceed Rs. 50 Lakhs

Lock in Period

With effect from 01.04.2018, the investment made in bonds shall not be redeemed or converted for a period of 5 years from the date of investment made.

Reversal of Exemption

If the investment made in long term specified capital assets is redeemed within a period of 5 years, the exemption provided earlier shall be considered as income of the year, in which such long term specified capital assets are transferred or converted and charged to tax as per section 45 of the Income Tax Act, 1961.


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