Saving Tax on Long Term Capital Gains through 54EC Bonds

You can claim exemption under Section 54 EC by investing the long-term capital gains for a period of three years in bonds of the National Highways Authority of India and Rural Electrification Corporation Limited.

Since the main function of these bonds is tax saving, the interest rate on offer is a modest 6% per annum. 

It may be noted that Sec. 54EC bonds may be used to save tax on any long-term capital gain and not necessarily that from sale of property. For example, apart from property, sale of non-equity mutual funds, bonds, debentures, gold jewelry or even gold ETFs etc. may result in long term capital gains. Tax on such gains may be saved by investing the gain amount in the 54EC bonds.

Maximum limit

There is only one drawback to these bonds-the maximum investment in any one financial year is capped at Rs 50 lakhs for any transaction.

One has 6 months to invest in the bonds from the time of earning the capital gain.

Earlier, if one found that he or she would have capital gain of more than Rs 50 lakh in a particular financial year, then the sale transaction would be timed between December and March of the year. This way, the 6 month period overlapped two financial years which would in turn enable the investor to double the amount to Rs 1 crore (Rs 50 lakhs for each financial year). But Budget 2014 plugged this loophole and now, a maximum of Rs 50 lakh only may be invested for any transaction.

Capital Gain Account Scheme

If the new asset is not acquired up to the date of submission of return of income, then the tax payers will have to deposit money in Capital Gain Account Scheme with any bank authorized to open such accounts. The proof of deposit should be submitted along with return of income. On the basis of actual investment and the amount deposited in the deposit account, exemption will be given to the tax payer.

Other sections of saving tax on Long Term Capital Gains

Sec. 54 – Investing the gains on sale of residential property in buying another residential property.

Sec. 54F – Investing the gains on sale of any long term capital asset (other than residential property) in buying a residential property.

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