Capital Gain Exemption on Investment in Certain Bonds – Section 54EC

Eigible Assessee – Any person

Eligible Capital Gain – Any long term capital gain (From financial year 2018-19 only land or building will qualify for exemption)

Condition for exemption – The assessee has at any time within a period of 6 months after the date of such transfer invested the whole or any part of capital gains in the bonds redeemable after 3 years issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation Limited (REC). (From financial year 2018-19, only bonds which are redeemable after 5 years will qualify for exemption)

Investment made by the assesse in such bonds during any one financial year should not exceed rs. 50 lakhs.
Total Investment made by the assessee in such bonds during the year of transfer of original asset and subsequent financial year should not exceed rs. 50 lakh. (Inserted by Finance Act no. 2, 2014. Effective from financial year 2014-15)

Amount of exemption – The amount of exemption will be lower of following

a) amount of capital gain
b) cost of investment in such bonds

Lock in period – 3 years

If such bonds is transferred or redeemed within 3 years of its purchase, the amount of capital gains exempt earlier is taxable under the head “Capital Gains” as long term capital gain in the year of transfer or redemption of such bonds.
If any loan or advance on the security of such bonds, then the bonds are deemed to be redeemed on the date on which such loan or advance is taken.

Case Laws

Where assessee receives sale consideration in instalments and he invested amount in specified bonds within a  period of 6 months from the date of receipts, he was entitled to deduction. Mahesh Nemichandra Ganeshwade vs ITO (Pune 2012)

If assesse wants to invest in bonds of REC which are not available throughout the period of 6 month, the time limit of 6 month can be extended even if bonds of NHAI are available CIT vs Cello Plast (Mumbai 2012)

If investment in bonds is closed for subscription, investment made immediately after reopening of subscription is qualified for exemption even if 6 months has passed. Shree Ram engineering Vs CIT (2012)

Depreciable assets are always considered as short term capital asset for calculation of tax. But if depreciable assets are hold for more than 36 months then they are eligible for deduction under section 54EC CIT vs Aditya Medisales ltd. (2013 Guj.)

Prateek Agarwal

Prateek Agarwal

I am Practicing Chartered Accountant from Jaipur and in practice for more than 9 years. I writes mainly for GST and Finance.

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