Deduction under section 54EC on Capital Gain

Last updated: 18 November 2021

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Quick Summary

Section 54EC of the Income Tax Act allows investors to claim tax deductions on long-term capital gains arising from the sale of land or buildings. To avail this benefit, you must invest the capital gains in 'long-term specified assets' within six months of the transfer date. The investment amount is capped at fifty lakh rupees per financial year, and the invested funds are locked in for a period of five years.

54EC bonds, or capital gain bonds, are the best way to save long-term capital gain tax. 54EC bonds are specifically meant for investors earning capital gain and would like tax exemption on these gains. The tax deduction is available under section 54EC of the Income Tax Act. 54EC does not allow any tax exemption on short-term capital gain tax.

Section 54EC Bonds: Save Tax on Capital Gains

Provision as per Income Tax Act

Where the capital gain arises from the transfer of long-term capital assets being land or building or both and the assessee has, at any time within the period of 6 months has after the date of such transfer invested the whole or any part of capital gains, in "long-term specified asset" then the capital gain will be dealt according to the following:-

If the cost of "long-term specified asset" is not less than the amount of capital gain then the whole amount shall not be charged u/s 45.
If the cost of "long-term specified asset" is less than the amount of capital gain then the remaining amount shall be charged u/s 45.

The investment by the assessee in long term specified asset should be made within the period of six months from the date of transfer (date of debit from the bank account shall be considered not from the date of allotment) also the investment amount during the financial year and in the subsequent financial year does not exceed fifty lakh rupees.

Lock-in period

The amount invested in the long-term specified assets should not be transferred within 5 years from the date of acquisition.

Long term specified asset

Rural Electrification Corporation Ltd (REC)
Power Finance Corporation Ltd (PFC)
National Highway Authority of India (NHAI)
Indian Railway Finance Corporation (IRFC)

Minimum amount of investment is of Rs 10000 that is 1bond & maximum that can be purchased is 500 bonds.

Interest Rate and taxability

The interest rate on this bond is 5% payable annually, it is reduced from 5.75% p.a from July 2020.

No TDS shall be deducted from the interest on this bond, but shall be included total income of the assessee.

As per Finance Act 2018 if the assessee takes any loans or advance on the security of the long-term specified asset, he shall be deemed to be converted (otherwise than by transfer) such long-term specified asset into money on the date on which such loan or advance is taken.