Section 54EC of Income Tax Act for AY 2020-21: Tax Exemption on Long-Term Capital Gains

Understanding Section 54EC of Income Tax Act for AY 2020-21

The Indian government offers tax deductions and exemptions to individuals who invest in specific instruments or schemes. Section 54EC of the Income Tax Act is one such provision that provides tax relief to taxpayers. In this blog, we will discuss Section 54EC of the Income Tax Act for AY 2020-21 in detail.

Introduction to Section 54EC of Income Tax Act

Section 54EC of the Income Tax Act, 1961, provides an exemption from capital gains tax on long-term capital gains arising from the sale of certain assets. The exemption is available to individuals and Hindu Undivided Families (HUFs) who invest in specified bonds within six months of transferring the capital asset. The maximum amount that can be invested under this section is Rs. 50 lakh in one financial year.

Eligible Assets for Tax Exemption

Section 54EC provides tax exemption on long-term capital gains from the sale of the following assets:

1. Land or building or both
2. Securities, such as shares or mutual funds

Investment in Specified Bonds

The eligible bonds for investment under Section 54EC are notified by the central government. Currently, the eligible bonds are issued by the following entities:

1. National Highway Authority of India (NHAI)
2. Rural Electrification Corporation Limited (RECL)

The bonds have a lock-in period of five years from the date of investment. The interest on these bonds is taxable, but there is no tax deduction at source (TDS) on the interest earned.

Conditions for Availing Tax Exemption

To avail of the tax exemption under Section 54EC, the following conditions must be met:

1. The investment in specified bonds must be made within six months from the date of transferring the capital asset.
2. The investment must be made in the name of the individual or HUF.
3. The investment amount cannot exceed Rs. 50 lakh in one financial year.
4. The bonds cannot be sold or redeemed before the completion of the lock-in period of five years.
5. The capital gains arising from the sale of the specified bonds are taxable.

Benefits of Section 54EC

Section 54EC provides the following benefits to taxpayers:

1. It offers tax relief on long-term capital gains arising from the sale of specified assets.
2. It helps taxpayers save on taxes by investing in specified bonds.
3. It provides a safe and secure investment option with guaranteed returns.
4. It enables taxpayers to diversify their investment portfolio.

Calculation of Tax Exemption

The amount of tax exemption under Section 54EC is calculated as follows:

• If the amount of long-term capital gains from the sale of the asset is less than or equal to the amount invested in the specified bonds, then the entire amount of capital gains is exempt from tax.
• If the amount of long-term capital gains from the sale of the asset is greater than the amount invested in the specified bonds, then only the amount invested in the specified bonds is exempt from tax, and the remaining capital gains are taxable.

For example, if an individual sells a land asset for Rs. 1 crore and earns a long-term capital gain of Rs. 50 lakh, and invests Rs. 50 lakh in specified bonds, then the entire amount of capital gains will be exempt from tax. However, if the individual invests only Rs. 30 lakh in specified bonds, then only Rs. 30 lakh of capital gains will be exempt from tax, and the remaining Rs. 20 lakh will be taxable.

Applicability of Section 54EC

Section 54EC is applicable to individuals and HUFs. It is not applicable to companies, partnership firms, or any other type of taxpayer.

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Additionally, the provision is only applicable to long-term capital gains arising from the sale of specified assets. Long-term capital gains are those that arise from the sale of an asset that has been held for more than 24 months. Short-term capital gains, on the other hand, are those that arise from the sale of an asset that has been held for 24 months or less and are taxable at a higher rate.

Conclusion

In conclusion, Section 54EC of the Income Tax Act provides a significant tax benefit to taxpayers by allowing them to invest in specified bonds and claim an exemption from long-term capital gains tax. This provision not only helps taxpayers save on taxes but also provides a safe and secure investment option with guaranteed returns. It is important to understand the eligibility criteria and conditions for availing tax exemption under Section 54EC to ensure that taxpayers can take full advantage of this provision.

Read more useful content:

• section 234e of income tax act
• section 286 of income tax act
• section 90a of income tax act
• section 40a(7) of income tax act
• section 226(3) of income tax act
• section 24 of income tax act