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No More 54EC benefits for depreciable assets New Bill 2025

No More 54EC benefits for depreciable assets under Income Tax Bill 2025

The proposed changes in the new Income Tax Bill 2025 regarding Section 54EC deductions reflect a significant shift in how capital gains reinvestment exemptions will be treated, particularly concerning depreciable assets.

Old Interpretation on 54EC Benefits under Pre-2025 Bill

  • U/s 54EC of the Income Tax Act, 1961, the exemption was available for “long-term capital assets.” The Supreme Court’s ruling in CIT v. Dempo Company Ltd (2016) allowed even depreciable assets (which normally result in short-term gains u/s 50) to qualify for exemption if they were held for more than 36 months.

New Revision (2025 Bill, Section 85):  Recent Amendments, Section 54EC

  • Section 85 of the new Income Tax Bill 2025 redefines the eligibility: Replaces “long-term capital asset” with “long-term capital gain.” Depreciable assets (earlier allowed under CIT v. Dempo Company Ltd. (2016)) can no longer claim exemption u/s 54EC. This eliminates the ambiguity that previously allowed short-term gains from depreciable assets to qualify for 54EC reinvestment benefits. Now, only capital gains that are legally classified as long-term (not just based on holding period) will be eligible.
  • Section 54EC of the Income Tax Act, 1961 provides capital gains tax exemption if the long-term capital gains from the sale of immovable property (land or building) are reinvested into specified capital gain bonds. However, with the Income Tax Bill 2025, the exemption is restricted to cases where the gains are classified as long-term capital gains under the statute, closing the previous loophole that allowed depreciable assets to qualify for this benefit.
  • Gains from depreciable assets—computed as short-term u/s 50—will no longer qualify for exemption, even if the asset was held for more than 36 months. Only gains explicitly recognized as long-term under the tax statute will qualify for reinvestment benefits in 54EC bonds. The amendment effectively overturns the Supreme Court’s 2016 ruling by aligning the exemption strictly with long-term capital gains, not the nature of the asset.
  • Changes in Tax Treatment of Investments: ULIPs with premiums exceeding 10% of sum assured and those above ₹2.5 lakh annual premium to be covered. Securities held by investment funds (u/s 115UB) to be explicitly classified as capital assets u/s 2(14).

Section 54EC – Key Conditions to Avail Exemption

  • Eligible Taxpayers: Individuals, HUFs, companies, LLPs, firms, etc.
  • Eligible Assets: LTCG must arise from the sale of land, building, or both.
  • Holding Period: The property must have been held for at least 24 months.
  • Time Limit for Investment: Within 6 months from the date of transfer.
  • Gains from depreciable assets (Section 50 cases) no longer qualify for 54EC exemption. Investment funds u/s 115UB now explicitly hold securities as capital assets. High-premium ULIPs (above 10% of sum assured) will be considered taxable.
  • Eligible Bonds:
    • NHAI Bonds (National Highways Authority of India)
    • REC Bonds (Rural Electrification Corporation)
    • PFC Bonds (Power Finance Corporation)
    • IRFC Bonds (Indian Railway Finance Corporation)
      • Lock-in Period: 5 years (before April 2018, it was 3 years).
      • Maximum Investment Limit: ₹50 lakh per financial year.
      • Non-Transferable: Cannot be sold, transferred, or pledged as security.

How to Invest in 54EC Bonds?

Step-by-step process Invest in 54EC Bonds

  1. Download the bond application form from the official websites of REC, PFC, NHAI, or IRFC.
  2. Select the ‘Direct’ option for the application.
  3. Enter captcha and download the form (ZIP file).
  4. Extract, print, and fill out the form.
  5. Attach demand draft/account payee cheque and submit it at designated bank branches: Axis Bank, SBI, HDFC, ICICI, IDBI, IndusInd, Yes Bank, Canara Bank.
  6. Alternatively, transfer funds via NEFT/RTGS and mention the UTR number in the form.

Capital Gains Tax Planning: Investing In Maximizing 54EC Benefits

  • For real estate investors: Early tax planning is crucial to maximizing 54EC benefits.
  • For businesses & NRIs: The restriction on depreciable assets will impact tax strategies significantly. This change is likely to impact on businesses and individuals who previously structured transactions to claim 54EC exemptions.
  • For HNIs & Investment Funds: ULIP taxation and capital asset reclassification must be factored into financial planning.

Would you like assistance in optimizing capital gains tax planning for the upcoming financial year?

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