Last updated: March 12th, 2020 11:15 AM

Section 54EC of The Income Tax Act

Capital assets refer to a property of any kind which is held by a person, whether or not the property is connected with the business or profession of the assessee. The property can be either movable or immovable property. Also, the property can be tangible or intangible, fixed or circulating. Some examples of capital assets are land, building, plant and machinery, motor car, jewellery, furniture, patent, trademarks, share, debentures, and so on.

Exclusions from Capital Assets

The definition of capital assets mentioned above does not include the following –

1. Stock-in-trade, consumable stores, raw-material which has been held for the purpose of business or profession
2. Movable property held for personal use by the person or any dependent member
3. Agricultural land located in rural area
4. 6.5% gold bond or 7% gold bond or national defence gold bond issued by the Central Government
5. Special bearer bond
6. Gold deposit bond as issued under a gold deposit scheme

Types of Capital Assets

On the basis of the acquisition period of the capital assets, the same is divided into two parts, namely long-term capital assets and short-term capital assets. Long-term capital assets are assets which are held by the individual for a period of more than three years from the date of purchase. However, the said period would be more than 12 months in the case of shares. On the other hand, short term capital assets are assets which are held by the individual for the period of fewer than three years from the date of purchase, however, the said period would be less than 12 months in case of shares. In case the long term capital asset has transferred the gain arising out of the same is known as long term capital gain. The long term capital assets generally attract 20% tax. There is a certain exemption available against long term capital gain. Exemption available against long term capital gain is provided under sections 54, section 54EC, section 54F and section 54B of the Income Tax Act, 1961.

Exemption under Section 54EC

1. Exemption under section 54EC is available only in case of transfer of long term capital assets.
2. The individual has invested whole or any part of capital gain within a period of 6 months from the date of transfer;
3. The investment is done in the long term specified assets;
4. With effect from the financial year 2018-2019, the exemption available under section 54EC of the Income Tax Act, 1961 has been restricted only in case of capital gain arising from the transfer of long term capital assets being a transfer of land or building or both. It must be noted here that earlier exemption was available on the transfer of any assets, however, with effect from the financial year 2018-2019 exemption under section 54EC is available only in case of transfer of long term capital assets being land or building or both;
5. Long term specified assets are required to be held for a minimum period of 3 years. With effect from the financial year 2018-2019, the period of 3 years has been increased to a period of 5 years;
6. The long term specified assets on the basis of which exemption under section 54EC has been claimed are further not eligible for deduction under section 80C.

Long Term Specified Assets

Exemption under section 54EC of the Income Tax Act, 1961 is available in case the long term capital gain is invested in the long term specified assets. It is crucial to understand the coverage/meaning of long term specified assets. The long term specified assets means any bond redeemable after a period of 3 years (5 years from the financial year 2018-2019). The said bonds should have been issued on or after 1st April 2000. Qualifying bonds are listed hereunder –

• Bonds issued by the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981; or
• Bonds issued by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988; or
• Bonds issued by Rural Electrification Corporation; or
• Bonds issued by Power Finance Corporation Limited (Government has notified that said bonds issued on or after 15th June 2017) (notification no. 47/2017 dated 8th June 2017); or
• Bonds issued by Indian Railway Finance Corporation (Government has notified that said bonds issued on or after 8th August 2017) (notification no. 79/2017 dated 8th August 2017.

Amount of Exemption Available Under Section 54EC

The exemption is available under section 54EC of the Income Tax Act to the extent of capital gain is invested in long term specified assets. However, the maximum limit is INR 50 Lakhs.

Consequence of Transfer of Long Term Specified Assets

The long term specified assets may be transferred/converted into money within a period of 3 years (5 years from the financial year 2018-2019) from the date of its acquisition. In such cases, the amount exempted under section 54EC shall be deemed to be long term capital gain in the previous year in which the long term specified assets i.e. the bonds are transferred. It must be noted that as per the explanation contained in section 54EC in case the individual takes any loan or advances on the security of such specified assets, it would be deemed that the same has been converted into money on the date on which such loan or advances is taken and taxed accordingly.