Are you looking to save tax on your capital gain income but do not want to block your money by investing in a new house? Then you’ve come to the right place because we’ll be explaining “How Can a Person Save Taxes on Capital Gains by Investing in Bonds” in this article.
If a person sells land, a building, or both after having owned the land, building, or both for more than three years, any profit made on the transfer is taxable as a long-term capital gain. However, to reduce tax liability on such a capital gain, a person can opt to claim an exemption under sections 54, 54EC. and 54F. Under sections 54 and 54F, a person can save capital gain tax by purchasing a house within a defined period, while section 54EC allows a person to save tax on capital gain by investing in bonds, as notified by the government.
Section 54EC Exemption Explained
- All assesses are eligible to claim the benefit of exemption under section 54EC of the Income-tax Act of 1961.
- Section 54EC exemptions are only available for long-term capital gains made on the sale or transfer of land, buildings, or both.
- The assessee has to invest the amount of capital gain in the specified long-term assets. The assessee can invest the capital gain amount in full or in parts.
- The assessee has to purchase these long-term specified assets within a span of 6 months from the date of transfer of land, building, or both.
- The maximum amount eligible for exemption by investing in such long-term specified assets cannot exceed Rs. 50 lakhs during the year of transfer or in the subsequent financial year.
- If an assessee transfers the long-term specified assets for a monetary consideration at any time within 5 years of purchase, tax will be levied on the amount of capital gain previously exempted under section 54EC of the Income Tax Act.
- The assessee will have to consider the capital gain as part of his taxable income for the previous year in which he has sold or transferred such long-term specified assets.
What are these Long Term Specified Assets?
As per Clause (ba) of the Explanation occurring after sub-section (3), “long term specified assets” means-
Any bonds, redeemable after five years and issued on or after the 1st day of April 2018, by the
- National Highways Authority of India or
- Rural Electrification Corporation Limited, or
- any other bond notified in the Official Gazette by the Central Government, on this behalf.
For a better understanding, let us take an example and see how the provision of Section 54EC works-
Mr. Madhukar purchased a plot in December 2001 for Rs. 15,00,000. He sells the plot on 18.08.2021 for Rs. 1.20 Crores. He purchased bonds issued by NHAI on 03.10.21 for Rs. 40,00,000.
Mr. Madhukar also invested Rs. 35,00,000 in RBI Bonds on 13.11.2021. Mr. Madhukar intends to claim investment under Section 54 EC.
Let us first compute capital gain on sale of the plot –
Period of Holding – December 2001 to August 2021 (Long-Term)
|Sale Consideration of the Plot||Rs. 1,20,00,000|
|Less: Indexed Cost of Acquisition of the plot
(Rs15,00,000 X 317/100)
|Long Term Capital Gain||Rs.72,45,000|
|Less: Deduction u/s 54EC||Rs.40,00,000|
|Net Long-Term Capital Gain||Rs.32,45,000|
As stated above, Mr. Madhukar also invested Rs.35,00,000 in RBI Bonds. However, no exemption under section 54EC is available against such investment as RBI bonds do not fall under the definition of the “Long Term Specified Assets”.
The article is for educational and informational purposes only and does not constitute any advice or a legal opinion. The article is based upon relevant laws and/or facts applicable at the time of publication and has been prepared with due accuracy and reliability. Still, readers are requested to refer to the relevant provisions of the Income Tax Act, Circulars, Clarifications and/or any legal judgments, etc. in this regard. By the use of the said information, you agree that the author/investbuddy is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions thereof.