INVEST IN SPECIFIED BONDS AND SAVE TAX!

By: AYUSHI RAJA

 

Author

Ayushi Raja

 

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Section 54EC provides Exemption from payment of Long Term Capital Gain (LTCG)  if the investment is done in some specified bonds. Let us know more about it!

• The tax liability on Long Term Capital Gain from Sale of Immovable property can be reduced by purchasing/investing into specified bonds under Section 54EC .

• The Bonds eligible for Exemption under section 54EC include:

• Rural Electrification Corporation Limited or REC bonds,

• National Highway Authority of India or NHAI bonds,

• Power Finance Corporation Limited or PFC bonds,

• Indian Railway Finance Corporation Limited or IRFC bonds.

• The amount of Exemption under section 54EC will be lower of:

1. The cost of such bonds,

OR

2. The Capital Gain on Sale of Immovable property.

• These bonds are issued by Infrastructure Companies and are backed by the Hence, the risk factor of buying such bonds gets mitigated. They are redeemed before maturity. The interest income arising on such bonds are taxable in the hands of the holder under the head Income From Other Sources.

• Following are the key factors for a availment of Exemption under section 54EC :

  1. The investment has to be made within 6 months of the date of Sale of Immovable property.

  2. Such investment can be redeemed only after 5 years. (For investments made before April 2018, redemptions can be done within 3 years.)

  3. Exemption on investment is allowed only against Long Term Capital Gains on sale of Immovable Property.

  4. Maximum deduction allowed is restricted to Rs. 50Lakhs.

Let us understand the concept with the help of an illustration:

Assuming that an immovable property is sold for Rs. 80 Lakhs (held for more than 36 months). The indexed cost of acquisition being Rs. 50 Lakhs. Amount invested in REC Bonds after 4 months of Sale amounts to Rs. 15 Lakhs.

Particulars	Amount (in Lakhs)
Sale consideration	80.00
Less: Indexed cost of acquisition	(45.00)
Less: Indexed cost of improvement	NIL
Long Term Capital Gain	35
Less: Investment in REC bonds	(20.00)
Taxable Long Term Capital Gain	15.00