Deduction under section 54EC of Income Tax Act 1961 by investment in bonds notified by Government of India.
The benefit under section 54EC of Income Tax Act 1961 can be availed when the assessee transfers long-term capital asset being land or building or both. The capital gain arises from sale of such long term asset is invested in two bonds notified by the Government of India.
The land or building or both can be long term in nature when it is held by person for more than 24 months.
Bonds notified by the Government of India are National Highways Authority of India (NHAI) or Rural Electrification Corporation Ltd. (RECL).
The assessee can make investments not exceeding Rs 50 lakhs in a given financial year in the two bonds notified by the Government of India. In case only part investment is made, the amount of deduction gets reduced in proportion to the investment.
The assessee should within a period of 6 months from the date of transfer invest the gains in Long Term specified bonds as issued by NHAI and RECL for a minimum period of 3 years
Note : Minimum investment period is 5 years if such bonds are issued on or after 01.04.2018
As per Bombay High Court Judgement in case of Hindustan Unilever Ltd vs. DCIT if the assessee has made investment in the bonds within the period of 6 months from the date of transfer of long term capital asset but the bonds were issued after 6 months than exemption under section 54EC cannot be denied. That is the assessee should make payment within the period of 6 months to avail the benefit of section 54EC of Income Tax Act 1961
In cases where the assessee converts the specified asset into cash, or takes a loan or advance on the security of such specified asset within a period of 3 years (5 years if the investment is made in specified asset on or after 01.04.2018) from the date of its acquisition, the amount of Capital Gain exempt u/s 54EC shall be deemed to be Long Term Capital Gain of the previous year in which the Long Term Capital Asset is transferred or converted into money or on the date such loan or advance is taken.
These bonds can be held in dematerialised form or in physical form. The bonds can be held under a single name or joint names. The facility for nomination is also available on these bonds. These bonds are non-transferable, non-negotiable and cannot be offered as security for any loan or advance. However, transmission of the bonds to legal heirs in case of death of the bondholder is allowed under the rules.
The NHAI and RECL bonds carry interest at 5.75 per cent per annum, payable annually w.e.f 01.04.2018. The interest earned on these bonds is fully taxable under the head “Income from Other Sources”. No tax at source would be deducted from the interest on these bonds.