Section 54EC- Deduction on LTCG Through Capital Gain Bonds (2024)

FAQs

Section 54EC- Deduction on LTCG Through Capital Gain Bonds? ›

Section 54EC of the Income Tax Act provides a tax-saving opportunity for individuals selling long-term immovable property. Investors can enjoy tax exemptions by investing in specified capital gains bonds like those issued by REC, NHAI, PFC, or IRFC.

Section 54EC bonds, which are often called Capital Gain Bonds, are fixed-income investment options that provide investors with tax exemptions on capital gains. With the help of these bonds, investors can reduce their tax liabilities related to long-term capital gains from the sale of real estate.

The maximum limit for investing in 54EC bonds is Rs. 50,00,000. The eligible bonds under Section 54EC are REC (Rural Electrification Corporation Ltd), PFC (Power Finance Corporation Ltd) and IRFC (Indian Railways Finance Corporation Limited).

Bonds eligible under section 54EC

These bonds have a fixed maturity period of 5 years and are redeemable after lock-in period is completed. The proceeds received by the investors on maturity or after selling under exceptional circ*mstances (nailed down) are exempt from being taxed under Section 54EC up to Rs.

Is the interest income from these bonds taxable? Yes, the interest income earned from 54EC Capital Gain Bonds is taxable as per your income tax slab. However, there is no Tax deduction at source (TDS) in these bonds.

Features of 54 EC Bonds

54EC Bonds have an interest rate of 5.25% per annum currently which is payable annually. This income is taxable although no TDS is deducted. 54 EC bonds have a maturity of 5 years from the date of issuance.

However, Section 54EC of the Income Tax Act allows a deduction of up to Rs 50 lakh from the profit if invested in capital gain bonds within six months from the day you sell your property. This means putting your money in such bonds can save you up to Rs 10 lakh on taxes (20 per cent of Rs 50 lakh).

No, you cannot redeem before the maturity of bonds.

Exemption from Long-Term Capital Gains Tax: One of the primary tax benefits of 54EC Bonds is that they provide an exemption from long-term capital gains tax. If an investor invests the capital gains from the sale of a long-term asset in 54EC Bonds, they can claim a tax exemption on the gains up to a maximum of Rs.

Such investment is held for 5 years and the bonds so acquired cannot be transferred or converted into money or any loan or advance can be taken on security of such bond within 5 years from date of acquisition else, the capital gain exemption benefit would be withdrawn.

How do I claim exemption under section 54EC? ›

An assessee can only claim deductions or exemption under Section 54EC up to the amount of capital gains that he/she has invested in the long-term specified asset provided that the investment has taken place prior to the completion of six months from the asset transfer date.

Conditions for Section 54EC Bonds Exemption

The investment in specified bonds must be made within 6 months from the date of sale of immovable property. The invested amount cannot be redeemed before a lock-in period of 5 years. Prior to April 2018, the redemption period was 3 years.

To avoid this deduction, you can submit either Form 15G or Form 15H to the issuer, requesting non-deduction of TDS. It is important to note that the TDS provision applies only to bonds issued by companies. Government bonds, including sovereign gold bonds, are exempt from the TDS requirement.

Like other investments, the tax owed on bonds and bond funds can be deferred by holding them in a tax-advantaged retirement account, such as a 401(k) or IRA. With that strategy, you won't owe any tax until you withdraw money at retirement, at which point you'll owe ordinary income tax on any distribution.

Capital gains yield is calculated the same way for a bond as it is for a stock: the increase in the price of the bond divided by the original price of the bond. For instance, if a bond is purchased for $100 (or par) and later rises to $120, the capital gains yield on the bond is 20%.

NRIs can claim deductions by investing in Capital Gain Bonds issued by REC and NHAI under Section 54 EC. These bonds have a 3 year lock-in period.

You have to invest a minimum of Rs. 10,000 in one bond and a maximum of Rs. 50 lakhs in 500 bonds. 54EC bonds have an interest rate of 5.25%, payable annually.

Can I invest in 54EC bonds after 6 months? You must invest in 54EC Bonds within six months from the sale of the asset that generated the capital gains. If you miss this timeframe, you won't be eligible for the tax benefits provided by the bonds.

If you buy a bond when it is issued and hold it until maturity, you generally won't have a capital gain or loss. If you sell the bond before its maturity date, you'll typically have a capital gain or capital loss, depending on the selling price.