Overview of Section 54EC Exemption on Investment in Bonds

LTCG Exemption u/s 54EC via Investment in Capital Gain Bonds

When a taxpayer sells long-term immovable property (land, building, or both), they can avail of capital gains tax exemption by reinvesting the gains in specified 54EC bonds. These are fixed-income instruments offering a tax-efficient way to reinvest capital gains.  An individual can claim multiple exemptions u/s 54EC for different financial years, but the total investment cannot exceed INR 50,00,000/- in a FY. If the individual does not invest the capital gains in specified capital gains bonds, the applicable tax rate on LTCG from sale of real estate is 20%. To qualify for the exemption, the taxpayer must meet the following conditions:

Facts to Avail Eligibility Criteria on LTCG Exemption U/s 54EC

• Eligible Taxpayers: Any taxpayer, including Individuals, Hindu Undivided Families (HUFs), Companies, LLPs, Firms, etc., can claim this exemption. Section 54EC bonds provide tax exemption on capital gains, reducing tax liability.
• The taxpayer must invest the capital gains or the net consideration, whichever is lower, in Section 54EC bonds within six months from the date of the original asset’s sale. The date of allotment of the bonds is considered the date of investment.
• Nature of the Asset: The exemption applies to long-term capital assets, specifically land, buildings, or both. The asset must be held for at least 24 months before sale to qualify as a long-term capital asset.
• Maximum Exemption Limit: The maximum investment allowed is INR 50,00,000/- per FY. Investments made in 2 consecutive FY’s can be cumulatively restricted to INR 50,00,000/-.
• U/s 54EC Bonds held in a Demat account: investors can hold 54EC Bonds in a Demat account or in physical certificate form.
• Eligible Bonds: Investments must be made in specified government-backed bonds, such as:
  • National Highways Authority of India(NHAI)
  • Rural Electrification Corporation (REC)
  • Power Finance Corporation Limited.(PFC)
  • Indian Railway Finance Corporation Limited (IRFC).

These bonds offer stable returns with a fixed interest rate. Issued by reputed public sector entities, ensuring low risk. NRIs can claim the exemption u/s 54EC . But land or buildings sold to generate the capital gain must be located in India.

• Eligible Capital Gains: Exemption is only available for LTCG arising from the sale of land, building, or both.
• Lock-in period for 54EC Bonds: The lock-in period is 5 years, during which the investment cannot be transferred, sold, or used as collateral. The bonds must be held for the full tenure to retain the exemption benefit. The bonds cannot be transferred, converted, or used as collateral for loans during this period. Prior to April 2018, the lock-in was 3 years.
• Timeline investors invest in 54EC Bonds to claim an exemption: The investment must be made within 6 months from the date of transfer of the immovable property. If the investment is made after a 6-month period, the amount invested will not be eligible for tax exemption u/s 54EC.

Changes Proposed in Section 54EC Deductions in the New Income Tax Bill 2025

Section 54EC provided an exemption on capital gains reinvested in specified bonds (such as REC/NHAI bonds). The exemption applied to gains from the sale of “long-term capital assets,” including land and buildings.

The Hon’ble Supreme Court ruled that depreciable assets (classified as short-term under Section 50 of the Act) could still qualify for Section 54EC exemption if held for more than 36 months. This interpretation extended the benefit to assets that, despite being treated as short-term due to depreciation rules, were in essence held for the long term.(Supreme Court Interpretation – CIT v. Dempo Company Ltd (2016) )

Legislative Change in the New Income Tax Bill 2025: Section 85 of the Income Tax Bill 2025 replaces the term “long-term capital asset” with “long-term capital gain” in Section 54EC. Key impact legislative change in the New Income Tax Bill 2025. The exemption will now apply only to gains classified as “long-term” under statutory provisions and not just assets held for a long duration. 

Depreciable assets that generate STCG  u/s 50 will no longer be eligible for reinvestment benefits under Section 54EC. This amendment overrides the Supreme Court’s ruling and ensures that the exemption is available only for “long-term capital gains” as per statutory classification. Budget change aligns with the government’s intent to restrict the reinvestment exemption strictly to LTCG, closing the loophole created by judicial interpretation.

Conclusion: Section 85 serves as a legislative correction to prevent short-term capital gains (from depreciable assets) from benefiting u/s 54EC.

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