SECTION 54EC OF INCOME TAX ACT

INTRODUCTION:-

 The provision under Section 54EC of the Income Tax Act states that if taxpayers invest the proceeds from the sale of any long-term asset into specified assets (bonds) within six months of the sale, they are eligible to claim an exemption from long-term capital gains tax. However, this exemption is only valid for up to Rs. 50 lakhs each Financial year.

IMPORTANT DEFINITIONS UNDER SECTION 54EC: –

SPECIFIED ASSETS (CAPITAL GAIN BONDS): –

In order to encourage taxpayers to invest their capital gains in designated bonds Section 54EC of the Income Tax Act was inserted. These bonds have a 5 years lock-in period and were issued by financial institutions with the assistance of the government.

Section 54EC capital gain bonds are fixed-income products also known as 54EC bonds. These bonds give investors an exemption from capital gains tax under section 54EC. 54EC bonds can be used to lower the tax liability on long-term capital gains from the sale of movable property. According to the Income Tax Act, long-term capital gains (LTCG) are taxable. However, the 54EC bonds are tax-free, which means that the interest earned on these bonds is not subject to any tax.

CAPITAL GAINS:-

Capital Gains are profits or gains that result from the transfer of a capital asset and are subject to taxation under the “Capital Gains”. “Short Term Capital Gains” and “Long Term Capital Gains” are two categories of income from capital gains.

ELIGIBILITY CRITERIA FOR SECTION 54EC:-

Section 54EC of the Income Tax Act is applicable only to long-term capital gains arising from the sale of specified assets such as land, building, or securities like shares and mutual funds. Short-term capital gains are not eligible for exemption under this provision. The taxpayers are eligible to take advantage of the benefits and deductions granted by Section 54EC, only if the following requirements have been met:

• The transfer of such an asset must produce long-term capital gains or profits and the asset must be a long-term capital asset.
• The transfer of the disputed long-term capital asset should have happened after April 1, 2000.
• The long-term defined asset must receive the taxpayer’s capital gains or profits, whether fully or partially, from the transfer of the long-term capital asset.
• Investment in the long-term designated assets must be made within 6 months from the transfer date of the long-term/original asset.
• Any investment that the taxpayer has made throughout the course of any financial year must not exceed Rs 50 lakh in accordance with the rules set forth in Section 54EC(1).
• Any capital gains arising on investing in the aforementioned bonds, the taxpayer will not be eligible for tax deductions under Section 80C.

QUANTUM OF EXEMPTION UNDER SECTION 54EC

Depending on the amount of capital gains invested, the taxpayer may be able to claim tax deductions under 54EC. The following explanation can help to clarify this:

Full Investment – If the taxpayer satisfies the above requirements or standards, they will be qualified to receive tax deductions for the full amount of capital gains or profits earned, provided that the entire amount they have accumulated has been invested in the designated long-term asset.

For Example:-

If the taxpayer has invested Rs. 20 lakhs in bonds listed under Section 54EC after accruing Rs. 20 lakhs in capital gains from the transfer of assets, the full amount invested is exempt.

Partial Investment – If the taxpayer satisfies the above requirements but only invests a portion of the capital gains he or she has accumulated in the designated long-term asset, the taxpayer may only deduct expenses up to an amount that is proportionate to the amount invested.

For Example:-

when the taxpayer transfers assets that result in capital gains of Rs. 20 lakhs, only the first Rs. 15 lakhs of those gains will be invested and exempt from tax; the remaining Rs. 5 lakhs of those gains, which were not invested in bonds covered by Section 54EC, are subject to tax.

Examples of Deduction Regarding Section 54EC:-

Investment made before six months from the asset transfer date allows deductions/exemptions under Section 54EC limited to invested capital gains.

CONCLUSION FOR SECTION 54EC:-

If you have LTCG and are seeking a tax-efficient investment strategy, 54EC bonds may be an appropriate option. These bonds are safe and secure investments, as these are issued by financial organizations that are supported by the government. The investor may also decrease tax burden by investing in Section 54EC of the Income Tax Act.

In conclusion, taxpayers who have realized LTCG from the sale of specific assets have a tax-effective investment. Sorting Tax Advisory Services Private Limited may help you to get the tax benefit by purchasing 54EC bonds. This will be in addition to a safe and secure investment alternative. However, before making an investment, investors should do their research and be aware of the lock-in term for these bonds.