Introduction/ Situation

When you sell an immovable property like Land or building for a gain/ profit after holding the property for more than 24 months you are obligated to pay tax on such long term capital gain earned.

Solution: Exemption under section 54EC

Section 54EC of Income Tax Act, 1962 allows you to claim exemption on tax liability of upto Rs. 50 Lakhs on long-term capital gains from sale of immovable property made by you, be reduced by purchasing 54EC bonds.

• These bonds are issued by infrastructure companies that are backed by the government. Hence, the risk factor gets mitigated by buying such bonds.
• These bonds are redeemable before maturity, but you cannot sell these bonds as they are not listed in the stock exchange.

Tips: However if you have capital gain exceeding INR 50 Lakhs then you can combine this with investment in house property under section 54 of Income Tax Act.

What are the bonds to be invested in to be eligible for exemption under section 54EC of the Income Tax Act ?

• Rural Electrification Corporation Limited or REC bonds.
• Rural Electrification Corporation Limited or REC bonds.
• Power Finance Corporation Limited or PFC bonds.
• Indian Railway Finance Corporation Limited or IRFC bonds.

Note: The issue of National Highway Authority of India or NHAI bonds has been discontinued with effect from 03-09-2022. Though further issue has been discontinued, the exemption for the bonds remain unaffected.

Who can claim the exemption?

• The exemption on investment is allowed only against long term capital gains on sale of immovable property (i.e,sale of land or building)
• Thus when you sell your land or building and obtain a lon term capital gain on its sale such gain is elegible for the exemption

What is the exemption limit?

• The exemption is against the long term capital gains income acrose from the sale of immovable property(i.e,land and building)
• The exemption is available up to maximum amount of rs 50 Lakh in a financial year,

How to claim the exemption?

• To avail the tax-exemption you must make the investment within 6 months of the date of sale of immovable property
• The investment shall be made in the list of bonds mentioned above

How to claim the exemption?

• Such investment can redeemed only after 5 years.Before April 2018 the bond could be redeemed within 3 years.
• In case if the capital gain bonds are converted into cash before the period of maturity(5 years) , then the amount so invested on which tax exemption was claimed,shall be taxable as long term capital gain in the years of conversion

Examples

Example 1

You have sold an immovable property at Rs. 120 lakh after a period of 42 months from the date of acquisition.

The indexed cost of acquisition is 50 lakh and cost of improvement is Rs. 10 lakhs.

Later, you have invested 60 lakhs in REC bonds within 6 months.

You can claim the exemption of upto 50 Lakhs though you have invested 60 Lakhs as the exemption is limited to 50 Lakhs.

Example 2

You have sold an immovable property at Rs. 120 lakh after a period of 42 months from the date of acquisition.

The indexed cost of acquisition is 50 lakh and the cost of improvement is Rs. 10 lakhs.

Later, You have invested 30 lakhs in REC bonds after 8 months form the date of sale.

The exemption is not available to you as the investments were not made within a period of 6 months

Example 3

You have sold an immovable property at Rs. 120 lakhs after a term period of 12 months from the date of acquisition.

The indexed cost of acquisition is 50 lakh and cost of improvement is Rs. 10 lakhs.

Later, you have invested 60 lakhs in REC bonds within 4 months.

The exemption is not available to you, as it is available only for long term capital gain on immovable property.

Example 4

You have sold an immovable property at Rs. 120 lakh after a period of 42 months from the date of acquisition.

The indexed cost of acquisition is 50 lakh and cost of improvement is Rs. 10 lakhs.

Later, you have invested 30 lakhs in REC bonds within 6 months, and 30 lakhs in Sovereign gold bonds within 6 months.

The exemption is available to you only up to the investments made in the specified bonds and within the specified time.

Further, you have sold the investment in REC bonds in the next financial year. In such a case the exemption claimed in the current year will be revered in the next year and you will become liable to pay tax on long term capital gain for the amount on which he has claimed exemption under section 54EC and sold off the respective investment.

Note:
As mentioned before, these bonds are not listed in the stock exchange. Hence you can buy them by the issuer directly either in a Demat form or a physical form and shall be applied for through their websites.

Interest on investments in the bonds

• The interest rate offered by bonds specified under Section 54EC is between 5 to 6% per year.
• Interest earned from these bonds is not free from tax. Any interest earned by you on these bonds will be taxed in full.

XIRR when Investment made in REC bonds/ Fixed Deposits

• XIRR or extended internal rate of return is a single rate of return that provides the current value of the entire investment when applied to each systematic investment plan.
• Let us consider the below scenarios:
  1. 50 Lakhs of capital gain is invested in REC Bonds.
  2. 20% Tax is paid on 50 Lakhs of capital gain and the balance 40 Lakhs is invested if fixed deposits.
• We will analyse the returns from the investments made in the above scenarios and conclude which is more beneficial based on their XIRR.
• Based on the above analysis and the XIRR calculated, we can conclude that investing in REC Bond is more beneficial than investing in fixed deposits after paying tax on the capital gain.