Section 54EE of the Income Tax Act was introduced in the Finance Act, 2018. It provides for an exemption from capital gains tax on the sale of long-term assets such as land or buildings, provided the proceeds are invested in specified bonds within six months from the date of transfer of the asset.
The objective of Section 54EE is to encourage investment in specified bonds and promote the development of infrastructure in the country. These bonds are issued by National Highways Authority of India (NHAI) and Rural Electrification Corporation Limited (REC).
Here are some key points to keep in mind while considering Section 54EE:
- Eligibility criteria: To claim the exemption under Section 54EE, the following conditions must be met:
a. The asset sold must be a long-term capital asset, i.e., it must have been held for more than two years.
b. The proceeds from the sale of the asset must be invested in specified bonds within six months from the date of transfer of the asset.
c. The maximum amount that can be invested in these bonds is Rs. 50 lakh per financial year.
d. The bonds must be held for a minimum of five years from the date of their acquisition.
- Exemption from capital gains tax: If the above conditions are met, the capital gains arising from the sale of the asset will be exempt from tax. However, if the bonds are sold before the completion of five years, the exemption will be withdrawn, and the capital gains tax will be payable in the year in which the bonds are sold.
- Specified bonds: The specified bonds under Section 54EE are issued by NHAI and REC. These bonds are issued in dematerialized form and can be purchased through a stockbroker or a depository participant. The interest rate on these bonds is decided by the government from time to time.
- Non-applicability: Section 54EE is not applicable if the capital gains from the sale of the asset have been claimed as an exemption under any other provision of the Income Tax Act.
- Capital Gains Calculation: The amount of capital gains that are exempted under Section 54EE is limited to the amount invested in the specified bonds. For example, if an individual sells a long-term capital asset for Rs. 60 lakh and invests only Rs. 40 lakh in specified bonds, then only Rs. 40 lakh worth of capital gains will be exempted, and the remaining Rs. 20 lakh will be taxed as per the applicable rates.
- Modes of Investment: The investment in specified bonds can be made through various modes such as online, offline, or physical mode. Investors can buy these bonds from the designated branches of the issuing authorities, stock exchanges, or other authorized intermediaries.
- Lock-in Period: The investment in specified bonds has a lock-in period of five years. This means that investors cannot sell or transfer these bonds for at least five years from the date of acquisition. If investors decide to sell these bonds before the completion of the lock-in period, then the capital gains tax exemption that they had claimed will be revoked, and they will have to pay the applicable taxes.
- Limitations: As mentioned earlier, the investment in specified bonds under Section 54EE is limited to Rs. 50 lakh per financial year. This means that if an individual has sold multiple assets during a financial year, the maximum investment that can be made in specified bonds will still be limited to Rs. 50 lakh.
- Availability of Bonds: The specified bonds issued by NHAI and REC are not always available in the market. These bonds are usually issued through public offers, and the availability of these bonds depends on the market conditions and the demand for these bonds.
In conclusion
Section 54EE of the Income Tax Act is a beneficial provision for taxpayers who sell long-term capital assets and want to save on capital gains tax. However, it is essential to meet all the conditions and limitations under this section to avoid any tax implications. Investors should also evaluate the risk and return associated with investing in specified bonds before making any investment decisions.
Other Related Blogs: 80U Deductions
Frequently Asked Questions (FAQs)
Q.1 What is Section 54EE of the Income Tax Act?
A Section 54EE is a provision in the Income Tax Act that provides for an exemption from capital gains tax on the sale of long-term assets, provided the proceeds are invested in specified bonds within six months from the date of transfer of the asset.
Q.2 What is the objective of Section 54EE?
A The objective of Section 54EE is to promote investment in specified bonds and promote the development of infrastructure in the country.
Q.3 What are specified bonds under Section 54EE?
A The specified bonds under Section 54EE are issued by National Highways Authority of India (NHAI) and Rural Electrification Corporation Limited (REC).
Q.4 What is the maximum investment allowed in specified bonds under Section 54EE?
A The maximum investment allowed in specified bonds under Section 54EE is Rs. 50 lakh per financial year.
Q.5 What is the lock-in period for specified bonds under Section 54EE?
A The lock-in period for specified bonds under Section 54EE is five years from the date of acquisition.
Q.6 Can the exemption under Section 54EE be claimed if the capital gains have been claimed as an exemption under any other provision of the Income Tax Act?
A No, the exemption under Section 54EE cannot be claimed if the capital gains have been claimed as an exemption under any other provision of the Income Tax Act.
Q.7 Can specified bonds be sold before the completion of the lock-in period?
A No, specified bonds cannot be sold before the completion of the lock-in period of five years. If the bonds are sold before the completion of the lock-in period, then the exemption claimed under Section 54EE will be withdrawn, and the capital gains tax will be payable.
Q.8 Are specified bonds always available in the market?
A No, specified bonds issued by NHAI and REC are not always available in the market. These bonds are usually issued through public offers, and the availability of these bonds depends on the market conditions and demand.
Q.9 How is the exemption under Section 54EE calculated?
A The amount of capital gains that are exempted under Section 54EE is limited to the amount invested in specified bonds. If an investor invests Rs. 40 lakh in specified bonds and sells a long-term capital asset for Rs. 60 lakh, then only Rs. 40 lakh worth of capital gains will be exempted, and the remaining Rs. 20 lakh will be taxed as per the applicable rates.
Q.10 Is Section 54EE applicable to all taxpayers?
A Yes, Section 54EE is applicable to all taxpayers, including individuals, Hindu Undivided Families (HUFs), and non-resident Indians (NRIs).
