Section 54EC

Updated: 31-01-2023 05:30:25 AM

What is Section 54EC?

Section 54EC of the Income Tax Act, 1961 lays down the provision that capital gains are exempt from tax, if the long-term capital gains are invested in specified investment instruments within a pre-defined time period. Features of Section 54EC have been summarised as follows:

• Exemptions under Section 54EC are only available on gains from transfer of long-term capital assets
• The person must invest a part or the entire capital gains within 6 months from the date of asset transfer
• The benefit is available only if the investment is made in the specified long-term assets

When long-term capital assets are transferred, the gains made from the transaction will be called long-term capital gains. This attracts tax as well, termed as long-term capital gains tax or LTCG tax. However, there are certain exemptions available under Section 54, Section 54B, Section 54EC and Section 54F of the Income Tax Act 1961. As of FY 2018-19, exemption under Section 54EC applies only to transfer of long term capital assets specifically land, building or both.  

What is a Capital Asset?

Definition of the capital assets is mentioned in Section 2 (14) of the Income Tax Act 1961. According to this section, capital assets refer to any kind of property held by an individual whether it is related to business or not. On the basis of this, it can be said that capital assets include any kind of property whether it is movable or immovable, fixed or circulating, tangible or intangible. Common examples of capital assets as per the definition provided in the Income Tax Act are building, land, car, machinery and plant, patents, furniture, jewellery, shares, trademarks, debentures, etc.

The following is a short list of assets that are not considered as capital assets under the current rules:

• Consumable stores, stock-in-trade, raw materials, etc. being held for business or professional purpose
• Any movable property held for personal use
• Agricultural land/property located in the rural area
• Special bearer bonds
• 6.5% or 7% gold bond or national defence gold bonds issued by the Central Government
• Gold deposit bond issued under the gold deposit scheme

Long Term and Short Term Capital Assets

Capital assets can be classified as either short term or long term capital assets on the basis of the time period they are held prior to being sold. Any assets which are held for less than 3 years (12 months for equity shares and equity-oriented mutual funds) are considered short-term capital assets. On the other hand, if the same assets are held for more than 3 years (12 months for equity shares and equity-oriented mutual funds), then they are considered as long-term capital assets. Short term capital assets, when transferred, provide the seller with short term capital gains, while transfer of long term capital assets provide long term capital gains to the seller. 

Amended Section 54EC as per Budget 2019 Announcements 

In Budget 2019, the government has made some key announcements designed to amend the original Section 54EC of the Income Tax Act, 1961. These amendments will come into effect from April 1, 2019. Some of the key amendments are as follows:

• In sub-section 1, now the term long-term capital assets mean building or land or both
• In sub-section2, right before the ‘Explanation’, the following proviso shall be mentioned – “Provided that in case of long-term specified asset referred to in sub-clause (ii) of clause (ba) of the Explanation occurring after sub-section (3), this sub-section shall have effect as if for the words “three years”, the words “five years” had been substituted”
• In the ‘Explanation’ after the sub-section 3 for the clause “(ba)”, the below shall be substituted:

‘(ba)’, long-term specified assets for making any sort of investment under this section:

• On or after April 1, 2007 but before April 1, 2018, means bonds redeemable after 3 years and issued on or after April 1, 2007 but before April 1, 2018
• On or after April 1, 2018, means any bond which is redeemable after 5 years and issued on or after April 1, 2018 by the National Highway Authority of India (NHAI) constituted under Section 3 of the NHAI Act, 1988 and 68 of the Act 1988 or by the Rural Electrification Corporation Ltd., a company established and registered under the extant rules of the Companies Act 1956 or any other type of bond reported in the Official Gazette by the Central Government.

Subsequent to these amendments, the following are some of the salient features of Section 54EC: 

• The asset being transferred (sold) is either land/building or a combination of the two which has been held for the long term i.e. over 3 years. 
• The gains from such capital assets will be tax free as long as the investment is made in specified assets within a period of 6 months from the date of transfer of the asset. 
• The only other type of long term assets apart from land and building for which this tax benefit can be claimed are bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation Limited. The holding period for these bonds to qualify as long term assets is 3 years for bonds issued on/after April 1, 2018 and 5 years for these bonds, if issued on/after April 1, 2018.       

Exemption Amount Available Under Section 54EC

Exemptions available under this section are available up to the extent of capital gains invested in the specified long-term capital assets. The maximum limit for this tax benefit u/s 54EC is Rs. 50 lakh as of FY 2019-20.

Consequences of Transfer of Long-Term Specified Assets

If the long-term capital assets are converted or transferred into money within 3 years or 5 years from financial year 2018-19 from the date of acquisition, the amount exempted under Section 54EC will automatically be deemed as long-term capital gains for the previous financial year in the case of the long-term specified assets such as bonds. Subsequently, such gains will incur tax at the applicable rate. 

It should be noted that the explanation included in Section 54EC, if individuals take loans or advances on the security of such specified assets, would be deemed that the same assets have been converted into money on the date on which such loans or advances are taken and taxes will be payable as per the applicable capital gains tax rules.