Claiming Tax Deductions on Long-Term Capital Gains with Section 54EC Bonds

Section 54EC of the Income Tax Act, of 1961, helps individuals mitigate their tax liability by claiming exemptions on tax on their long-term capital gains. This is done by investing their capital gains on particular capital gain bonds. It must be noted that the maximum investment limit in such bonds is ₹50 Lakhs in a specific financial year.

You can claim tax deductions under Section 54EC based on the amount of capital gains you invest. Here are the deductions you can claim depending on your investment:

• Full Investment: You can enjoy tax exemption of the full capital gains amount if you invest in bonds with the full amount

• Partial Investment: You can claim tax exemption of up to a proportionally similar amount if you invest partially

 

The tax deduction that you can claim under Section 54EC depends on the amount of capital gains that you invested in the long-term specified asset. Here are some illustrations that can help you understand the deductions better:

1. Illustration for Full Investment

Suppose you accrue capital gains of ₹10 Lakhs on the sale of assets and invest the entire amount of ₹10 Lakhs in bonds. In this case, you can claim tax exemption on the entire amount of ₹10 Lakhs. 

2. Illustration for Partial Investment

If you accrue capital gains of ₹10 Lakhs on the sale of assets and invest a partial amount of ₹7 Lakhs in bonds. In this case, you can claim tax deductions on only ₹7 Lakhs. You need to pay tax on the remaining amount of ₹3 Lakhs.

 

Capital gain bonds have a lock-in period of five years. Before April 2018, the lock-in period was three years. The following factors concerning the lock-in period of capital gain bonds must be considered:

• If bonds are redeemed before maturity, tax exemption u/s 54EC won't be applicable

• If individuals get a loan against long-term assets, it implies that they have converted the bonds into cash on the day they borrowed the loan

Individuals can claim tax benefits under the following additional conditions as well:

• Two Individuals Buy a Bond Together

Suppose an assessee buys a bond jointly with another individual by using the profits from selling an original asset. In that case, they will be eligible to claim tax exemptions u/s 54EC on their long-term capital gains.

• Investments in Depreciable Assets

Suppose an individual sells a depreciable asset and has owned it for more than 36 months. They will be eligible to claim tax exemptions on such short-term capital gains. Since the depreciable assets are not considered short-term u/s 54, they will be eligible.  

• Installments

Within six months of the date on which the assessee receives the long-term capital gains on the specified long-term assets in installments, the assessee invests the profits. In that situation, he or she may be able to exclude the capital gains used to purchase the long-term capital asset.

• Zero Access to Long-term Capital Assets

If unable to invest capital gains in specified bonds u/s 54EC within 6 months due to unavailability, an individual may claim an exemption. The investor must explain why they could not invest the capital gains in the designated long-term assets within six months. 

 

Additionally, the individual must use the proceeds to invest in bonds whenever they become available.

• If the Subscription is Closed

The investment qualifies for exemption u/s 54EC if an individual makes it in long-term capital assets after the 6-month grace period due to subscription closure.

Suppose you transfer or convert the long-term capital assets into cash within 3-5 years from FY 2018-19 from the acquisition date. In this case, the exempted amount under Section 54EC will automatically be considered long-term capital gains for the previous year. Also, these profits will incur the applicable taxes. 

 

Note that if you get loans or advances based on the security of these specified assets, they will be considered as redeemed into money on the date of taking the loan. You need to pay the applicable capital gains tax on the amount.

Let’s take a look at an example to understand how section 54EC bonds can help you save tax:

Now that you know how to claim tax exemptions under Section 54EC, you can explore new ways to reduce your tax liabilities. If saving tax is your priority, you can invest in tax-saving investment options on Bajaj Markets. You can easily compare various options and benefit from a convenient online process with minimal documentation requirements.