Section 54EC provides that capital gain arising from the
transfer of a long-term capital asset, being land or building or both, invested
in the long-term specified asset at any time within a period of six months
after the date of such transfer, the capital gain shall not be charged to tax
subject to certain conditions specified in the said section.
Text of Section 54EC
[1][Capital gain not to be charged on
investment in certain bonds.
54EC. (1) Where the capital gain
arises from the transfer of a long-term capital asset [2][, being land or building or
both,] (the capital asset so transferred being hereafter in this section
referred to as the original asset) and the assessee has, at any time within a
period of six months after the date of such transfer, invested the whole or any
part of capital gains in the long-term specified asset, the capital gain shall
be dealt with in accordance with the following provisions of this section, that
is to say,—
(a) if the cost of the
long-term specified asset is not less than the capital gain arising from the
transfer of the original asset, the whole of such capital gain shall not be
charged under section 45;
(b) if the cost of the long-term specified asset is less than
the capital gain arising from the transfer of the original asset, so much of
the capital gain as bears to the whole of the capital gain the same proportion
as the cost of acquisition of the long-term specified asset bears to the whole
of the capital gain, shall not be charged under section 45 :
[3][Provided that the investment made
on or after the 1st day of April, 2007 in the long-term specified asset by an
assessee during any financial year does not exceed fifty lakh rupees :]
[4][ Provided further that the
investment made by an assessee in the long-term specified asset, from capital
gains arising from transfer of one or more original assets, during the
financial year in which the original asset or assets are transferred and in the
subsequent financial year does not exceed fifty lakh rupees.]
(2) Where the long-term specified asset is
transferred or converted (otherwise than by transfer) into money at any time
within a period of three years from the date of its acquisition, the amount of
capital gains arising from the transfer of the original asset not charged under
section 45 on the basis of the cost of such long-term specified asset as
provided in clause (a) or, as the case may be, clause (b) of sub-section (1)
shall be deemed to be the income chargeable under the head "Capital
gains" relating to long-term capital asset of the previous year in which
the long-term specified asset is transferred or converted (otherwise than by
transfer) into money.
[5] [Provided that in case of long-term
specified asset referred to in sub-clause (ii) of clause (ba) of the
Explanation occurring after sub-section (3), this sub-section shall have effect
as if for the words "three years", the words "five years" had
been substituted.
Explanation.—In a case where the
original asset is transferred and the assessee invests the whole or any part of
the capital gain received or accrued as a result of transfer of the original
asset in any long-term specified asset and such assessee takes any loan or
advance on the security of such specified asset, he shall be deemed to have
converted (otherwise than by transfer) such specified asset into money on the
date on which such loan or advance is taken.
[6][(3) Where the cost of the
long-term specified asset has been taken into account for the purposes of
clause (a) or clause (b) of sub-section (1),—
(a) a deduction from the amount of income-tax
with reference to such cost shall not be allowed under section 88 for any
assessment year ending before the 1st day of April, 2006;
(b) a deduction from the income
with reference to such cost shall not be allowed under section 80C for any
assessment year beginning on or after the 1st day of April, 2006.]
Explanation.—For the purposes of
this section,—
(a) "cost", in relation
to any long-term specified asset, means the amount invested in such specified
asset out of capital gains received or accruing as a result of the transfer of
the original asset;
[7][(b) "long-term specified
asset" for making any investment under this section during the period
commencing from the 1st day of April, 2006 and ending with the 31st day of
March, 2007, means any bond, redeemable after three years and issued on or
after the 1st day of April, 2006, but on or before the 31st day of March,
2007,—
(i) by the National Highways Authority of
India constituted under section 3 of the National Highways Authority of India
Act, 1988 (68 of 1988); or
(ii) by the Rural Electrification
Corporation Limited, a company formed and registered under the Companies Act,
1956 (1 of 1956),
and notified by the Central
Government in the Official Gazette for the purposes of this section with such
conditions (including the condition for providing a limit on the amount of
investment by an assessee in such bond) as it thinks fit:]
[7][Provided that where any bond has
been notified before the 1st day of April, 2007, subject to the conditions
specified in the notification, by the Central Government in the Official
Gazette under the provisions of clause (b) as they stood immediately before
their amendment by the Finance Act, 2007, such bond shall be deemed to be a
bond notified under this clause;]
[8][(ba) "long-term specified
asset" for making any investment under this section on or after the 1st
day of April, 2007 means any bond, redeemable after three years and issued on
or after the 1st day of April, 2007 by the National Highways Authority of India
constituted under section 3 of the National Highways Authority of India Act,
1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a
company formed and registered under the Companies Act, 1956 (1 of 1956) [now
Companies Act, 2013] [9][; or any other bond notified by
the Central Government in this behalf].]
Following clause (ba) shall be substituted
for the existing clause (ba) of Explanation to section 54EC by the Finance Act,
2018, with effect from 01.04.2019 :
(ba) "long-term specified
asset" for making any investment under this section,—
(i) on or after the 1st day of April, 2007 but before the 1st
day of April, 2018, means any bond, redeemable after three years and issued on
or after the 1st day of April, 2007 but before the 1st day of April, 2018;
(ii) on or after the 1st day of April, 2018, means any bond,
redeemable after five years and issued on or after the 1st day of April, 2018,
by the National Highways Authority of India constituted under section 3 of the
National Highways Authority of India Act, 1988 (68 of 1988) or by the Rural
Electrification Corporation Limited, a company formed and registered under the
Companies Act, 1956 (1 of 1956) [now Companies Act, 2013] or any other bond
notified in the Official Gazette by the Central Government in this behalf.
KEY NOTE
1. Inserted by the Finance Act, 2000, with
effect from 01.04.2001.
2.
Inserted by the Finance Act, 2018, with effect from 01.04.2019.
3. Inserted by the Finance Act, 2007, with
effect from 01.04.2007.
4. Inserted by the Finance (No. 2) Act, 2014,
with effect from 01.04.2015.
5. Inserted by the Finance Act, 2018, with effect from 01.04.2019.
6.
Substituted by the Finance Act, 2005, with effect from 01.04.2006.
7.
Substituted by the Finance Act, 2007, with retrospective effect from
01.04.2006.
8. Inserted ,
ibid, with effect from 01.04.2017.
9. Inserted by the Finance Act, 2017, with effect from
01.04.2018.
Who
can claim exemption?
This exemption is available to all categories of assessees
i.e. Individual, HUF, Firm, Company or any other person can claim exemption
under section 54EC. (including NRI out of NRO account on a non-repatriable basis)
Nature of the Asset
Long Term Capital Asset
Definition of capital
assets does not include following –
(i)
Stock-in-trade, consumable stores,
raw-material which has been held for the purpose of business or profession;
(ii)
Movable property held for personal use
by the person or any dependent member;
(iii)
Agricultural land located in rural
area;
(iv)
6.5% gold bond or 7% gold bond or
national defence gold bond issued by the Central Government;
(v)
Special bearer bond;
(vi)
Gold deposit bond as issued under gold
deposit scheme.
Which original asset is qualified for exemption?
A Long-term capital asset being land or building or both is
transferred by an assessee during the previous year is qualified for exemption.
With effect from assessment year 2019-20, the Finance Act,
2018 has restricted the scope of exemption under Section 54EC only in respect
of long-term capital gains arising from land or building or both. Further, the
lock-in period of these bonds, i.e., NHAI and RECL, has been increased to 5
years.
Which new asset should be purchased (acquired)?
v Notified Bonds issued on or after 01.04.2007 by National
Highway Authority of India (NHAI); or
v With effect from 01.04.2008 - Rural Electrification
Corporation Limited (RECL); or
v With effect from assessment year 2018-19, investment in any
bond redeemable after five (three years up to assessment year 2018-19) years
which has been notified by the Central Government in this behalf
Ø shall also be eligible for exemption.
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 into the long term specified assets. Long term
specified assets means any bond redeemable after a period of 3 years (5 years
from financial year 2018-2019). The said bonds should have been issued on or
after 1st April, 2000. Qualifying bonds are listed hereunder –
(i)
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
(ii)
Bonds
issued by the National Highways Authority of India constituted under section 3
of the National Highways Authority of India Act, 1988; or
(iii)
Bonds
issued by Rural Electrification Corporation; or
(iv)
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 8 th
June, 2017) ; or
(v)
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 8 th
August, 2017.
Essential conditions
(1) The assessee should transfer a long-term
capital asset being land or building or both (up to assessment year 2018-19 -
other than residential house property) during the previous year.
(2) The assessee
has to invest long-term capital gain within six months from the date of
transfer of Long-Term Capital Asset, being land or building or both.
(3) He has to
invest in one of the following Bonds:—
(a) Bonds redeemable after five years [three years - up to assessment
year 2018-19]
(b) Issued on or after 01.04.2007 and
(c) Issued by
(i)
Bonds issued by the National Highway
Authority of India (NHAI) or
(ii) Bonds issued by the Rural Electrification Corporation Limited
(RECL); or
(iii) By any other authority but bonds are notified by the Central
Government for this purpose [applicable from the assessment year 2018-19]
Ø If all the above conditions are satisfied then the assessee
can claim the exemption under section 54EC.
Holding period of new asset
The investment should be for minimum period of five years
[three years up to assessment year 2018-19].
Interest on notified for section 54EC bonds is
taxable
Interest is taxable
in the hands of the investor depending on his/her income tax slab.
Withdrawal of Section 54EC exemption if bonds issued on or
after 01.04.2018 transferred or redeemed within 5 years [Proviso to section 54EC(2)]
Section 54EC provides
exemptions up to Rs. 50 lakhs if any long-term capital gain is invested in the
specified bonds of NHAI and RECL within a period of six months after the date
of such transfer. Such investments in these bonds have a lock-in period of 3
years.
The Finance Act, 2018 has inserted
proviso in section 54EC(2), with effect
from 01.04.2019 restricted the scope of exemption under Section 54EC only in
respect of long-term capital gains arising from land or building or both.
Further, the lock-in period of these bonds, i.e., NHAI and RECL, has been
increased to 5 years. Accordingly, exemption shall be withdrawn if bonds issued
on or after 01.04.2018 are transferred or redeemed within 5 years.
PROVISIONS ILLUSTRATED:
On 05.11.2017 , Mr. ‘X’ sells gold for Rs. 15,00,000/- (cost
of acquisition on 15.03.2010 Rs. 2,00,000/-). Expenses on purchase and transfer
are Rs. 1,000/- and Rs. 2,000/-, respectively. On 01.05.2019, he acquires bonds
of National Highways Authority (investment being Rs. 7,00,000/-). These bonds
are redeemable after 42 months. Find out the exemption under section 54EC.
SOLUTION:
|
S. No. |
Particulars |
Amount (in Rs.) |
|
(i) |
Sale consideration |
15,00,000 |
|
(ii) |
Less : Expenses on transfer |
2,000 |
|
(iii) |
Net sale consideration |
14,98,000 |
|
(iv) |
Less : Indexed cost of acquisition i.e. |
3,90,540 |
|
(v) |
Long-term capital gain 2,00 000 x 289
148 |
11,07,460 |
|
(vi) |
Less : Exemption under section 54EC |
7,00,000 |
|
(vii) |
Capital gain chargeable to tax |
4,07,460 |
KEY NOTE :
(i) Mr. ‘X’ should not transfer the bonds of National
Highway Authority (NHA) of India or take a loan on the security of these bonds
or otherwise convert these bonds into money, within 3 years from 01.05.2018.
(ii) If Mr. ‘X’ transfers the bonds of National Highway
Authority (NHA) of India (or Mr. ‘X’ takes any loan or advance on security of
these bonds within 3 years from 01.05.2019, then Rs. 7,00,000/- will be deemed
income by way of long-term capital gain of the previous year in which he
transfers these bonds.
Up to assessment year 2018-19
Consequences if the asset is transferred within 3 years:
The bonds should not be transferred or converted into money
or any loan/ advance within a period of three years from the date of purchase.
In case the bonds are transferred within a period of 3 years from the date of
their purchase, the exemption allowed for investment earlier would be taxed in
the year of such transfer as capital gains.
For this purpose, it would be considered as transfer even if
the assessee takes any loan or advance on the security of the specified
securities. For the investment in the bonds, deduction under section 80C will
not be available.
If transferred or converted into money or took loan or
advance on the security of such asset within that period, so much of the
capital gains not charged earlier will be treated as capital gains of the year
of such transfer.
Amount of exemption available
(a) Amount of Investment in the specified bonds or
(b) Capital gains,
Ø whichever is lower. (Maximum Rs. 50 lakhs during any financial
year)
FOR EXAMPLE:
(a) Capital gain is Rs. 30 lakhs and the amount invested is
Rs. 30 lakhs.
Ø In this case, Rs. 30 lakhs is exempted and there will be no
capital gain tax.
(b) In another case, capital gain is Rs. 30 lakhs and the
amount invested is Rs. 16 lakhs.
Ø In this case, Rs. 16 lakhs is exempted and Rs. 14 lakhs will
be taxed as capital gain.
Maximum investment eligible
Rs. 50,00,000/- : The Investment made on or after 01.04.2007
in the long-term capital asset, specified asset by an assessee during any
financial year shall not exceed Rs. 50,00,000.
Period for investment is to be made in asset (i.e. Time
limit for Investment)
The investment is to be made within six months from the date
of transfer of the original capital asset.
Applicable up to assessment year 2018-19
Capital Gains arising from conversion of capital asset into
stock-in-trade shall be invested in specified assets under section 54EC within
6 months from the date of such stock-in-trade is sold or otherwise transferred
in terms of section 45(2).—[Board’s Circular No. 791, dated 02.06.2000]
If capital gain invested within the period of 6 months from
the date of transfer, exemption under section 54EC cannot be denied merely
because the Bond was issued after expiry of 6 months.—[Hindustan Unilever
Limited v. DCIT (2010) 325 ITR 102 (Bom)]
Consequence of Transfer of Long Term Specified
Assets
In case the
long term specified assets are transferred / converted into money within a
period of 5 years (3 years upto financial year 2017-2018) from the date of its
acquisition, 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.
Investment in bonds - Investment made from advance
received on sale of capital asset before date of transfer of asset will qualify
for exemption
It was held
that, investment made from advance received on sale of capital asset before
date of transfer of asset will qualify for exemption.( Related Assessment year : 2013-14) - [Rahul G. Patel. v. DCIT (2018) 195 TTJ 1027
: 173 ITD 1 : 171 DTR 1 (ITAT Ahmedabad)]
Amount received on transfer of rights to carry on
any business is taxable as capital gain and not as business income -
consequently deduction under section 54EC is available
Allowing
the appeal of the assessee the Tribunal held that , the amount received on
account of transfer of business is taxable as capital gains and not
as business income, consequently deduction under section 54EC is available in
respect of investment made in Govt Bonds. (Related Assessment Year : 2006-07)
[Suklendu A.Baji v.DCIT – Date of Judgement : 05.02.2018
(ITAT Mumbai)]
Investment in specified bonds from the amounts
received as an advance is eligible for section 54EC deduction. The fact that
the investment is made prior to the transfer of the asset is irrelevant
Thus, these amounts when received as advance under an Agreement to Sale
of a capital asset are invested in specified bonds the benefit of Section 54EC
of the Act is available. Moreover, on almost identical facts, this Court in
Parveen P. Bharucha Vs. DCIT, 348 ITR 325, held that the earnest money received
on sale of asset, when invested in specified bonds under Section 54EC of the
Act, is entitled to the benefit of Section 54EC of the Act. This was in the
context of reopening of an assessment and reliance was placed upon CBDT
Circular No. 359 dated 10th May, 1983 in the context of Section 54E of the Act.
(Related Assessment year : 2008-09) - [Jagdish C. Dhabalia v. ITO – Date of
Judgement : 14.12.2016) (Bom)]
Correctness of law laid down by Bombay High Court
in Ace Builder 281 ITR 210 that deduction under section 54EC is available to
short-term capital gains computed under section 50 doubted by Tribunal
By virtue of the deeming provision of section 50, cost of a long-term
capital asset (LTCA), i.e., as per section 2(29A), where depreciable, forming
part of a block assets on which depreciation stands claimed, the capital gain
on its transfer would have to be computed in terms thereof, i.e. by treating
the WDV of the relevant block of assets (or, as the case may be, the relevant
asset) as its cost of acquisition. The second deeming per the provision of
section 50 is qua the nature of such capital gains, i.e., as capital gains
arising from the transfer of a STCA. Section 54EC is available on capital gain
arising on the transfer of a LTCA, i.e., which is not a STCA by definition. The
same shall, therefore, not apply to capital gains computed under section 50. - [ACIT v. Kamlakar Moghe – Date of
Judgement : 04.09.2015 (Bom)
The period of "6 months" available for
making investment means 6 calendar months & not 180 days. Payment by cheque
dates back to date of presentation & not date of encashment
For purposes of section 54EC, as held by the Special Bench of Ahmedabad
bench in the case of Alkaben B. Patel (2014) 148 ITD 31 (Ahd) and M/s. Crucible
Trading Co. (P) Ltd. in ITA No.5994/Mum/2013 dated 25.02.2015 “6 months” have
been interpreted and it is held that the same would mean 6 calendar months and
not 180 days. As held by the Supreme Court in CIT v. Ogale Glass Works Ltd.
(1954) 25 ITR 529 (SC), in the case of cheques not having been dishonored but
having been encashed, the payment related back to the date of the receipt of
the cheques and in law the dates of payments were the dates of the delivery of
the cheques. - [Neela S. Karyakarte v. ITO - Date
of Judgement : 28.08.2015 (ITAT Mumbai)]
Assessee is eligible for deduction of Rs.1 Crore
in respect of investment of Rs.50 Lakhs made in two different financial years.
Proviso to section 54EC seeking to curb this has effect from Assessment year
2015-16
(i) On a plain reading of Section 54EC(1) of
the Act it is clear that it restricts the time limit for the period of
investment after the property has been sold to six months. There is no cap on
the investment to be made in bonds. The first proviso to Section 54EC(1) of the
Act specifies the quantum of investment and it states that the investment so
made on or after 01.04.2007 in the long-term specified asset by an assessee
during any financial year does not exceed fifty lakh rupees. In other words, as
per the mandate of Section 54EC(1) of the Act, the time limit for investment is
six months and the benefit that flows from the first proviso is that if the
assessee makes the investment of Rs.50,00,000/- in any financial year, it would
have the benefit of Section 54EC(1) of the Act.
(ii) The
legislature has chosen to remove the ambiguity in the proviso to Section
54EC(1) of the Act by inserting a second proviso with effect from 01.04.2015.
The memorandum explaining the provisions in the Finance (No. 2) Bill, 2014 also
states that the same will be applicable from 01.04.2015 in relation to
assessment year 2015-16 and the subsequent years. The intention of the
legislature probably appears to be that this amendment should be for the
assessment year 2015-2016 to avoid unwanted litigation of the previous years.
(related Assessment year : 2008-09) - [CIT
v. C. Jaichander – Date of Judgement : 15.09.2014 (Mad)]
Investment in bonds – Exemption –
Six months from the end of month
During
the previous year relevant to the assessment year under consideration the
assessee sold shares of two companies on 24th February 2005. The assessee
invested entire sale consideration on 30th August 2005, in the bonds specified
under section 54EC. i.e. REC Bonds. The Tribunal held that the word used in
section is “any time with in a period of six months after the date of such
transfer”. The term “month” is not defined in the Income-tax Act, 1961.
Applying the expression used in the General clauses Act, 1897, the term six
months should be reckoned from the end of month in which the transfer takes
place. On the facts as the invest were made on 30th August, 2005, the Tribunal
held that the assessee is entitled to exemption under section 54EC. (Related
Assessment year : 2005-06). - [Yahya E.
Dhariwala v. DCIT (2012) 247 CTR 230 : 49 SOT 458 (ITAT Mumbai)]
Investment in bonds – Exemption –
In joint names
To
claim exemption under sections 54 and 54EC what is material is investment of
sale consideration in acquiring residential premises or constructing a
residential premises or investing amount in bonds set out in section 54EC,
there is no requirement that such investments should be in name of assessee
only. Assessee sold her residential house property and invested part of sale
proceeds in purchasing residential house property and specified bonds in joint
names of assessee and her husband. The Court held that as entire consideration
had flown from assessee and no consideration had flown from her husband, merely
because either in sale deed or in bonds her husband’s name is mentioned, in
law, he would not have any right, and assessee could not be denied benefit of
deduction under section 54 and 54EC. (Related Assessment year 2007-08). - [CIT v. Voith Paper Fabrics India Ltd.
(2011) 245 CTR 516 : 64 DTR 58 (P&H)]
Investment
in bonds – Exemption – Allowable before set-off of brought forward loss
While section 54EC is an exemption
provision which exempts capital gains and takes them outside the purview of
chargeable “capital gains”, section 74 deals with the carry forward and set off
of loss under the head “capital gains”. The stage at which set off of carried
forward long term capital loss is to be given is subsequent to the stage at
which income under the head capital gains is computed and deduction under
section 54EC is to be given in the course of the latter. Accordingly, section
54EC deduction has to be given before set-off of losses. (Related Assessment
year : 2005-06) - [Tata Power Co. Ltd. v.
ACIT (2011) 47 SOT 470 (ITAT Mum)]
Investment in bonds – Exemption –
Date of payment – Delivery
The
Tribunal held that since the assessee had delivered the cheque to NABARD by 09.02.2006,
the date of payment would be the date of delivery of the cheque. The date when
the cheque was encashed by NABARD cannot be said to be the date of investment.
(Related Assessment year : 2006-07) - [Kumar
Amrutlal Doshi v. DCIT – Date of Judgement : 09.02.2011 (ITAT Mubai)]
Benefit
under section 54EC could be availed where bonds are purchased in joint name
Merely because bonds are in joint
name, assessee could not be denied benefit of deduction under section 54EC. As
far as it is established that the complete consideration has flown from the
assesse, the benefit could not be denied on this ground. - [DIT v. Mrs. Jennifer Bhide (2011) 15 taxmann.com 82 (Kar)]
Investment can be made in joint names
Exemption under section 54EC cannot be denied when
investment in notified bonds is made in joint names of assessee and her son and
not in her own name exclusively. - [ITO v. Saraswati Ramanathan (2008) 114
TTJ 803 (Del)]
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