NS Tax & Financial Services

Income-tax Act, 2025, Section 85 (Old Sec 54EC): Reinvesting long-term capital gains in specified bonds.

Long-term capital gains (LTCG) arising from the sale of land or building or both can be exempted by investing in specified bonds under Section 54EC (new section 85) of the Income Tax Act, subject to certain conditions.
Key Conditions for Section 54EC:

i) Eligible asset sold

- The asset must be land, building, or both.
- It must be a long-term capital asset (held for more than 24 months).

ii) Investment timeline

- You must invest the capital gains in eligible 54EC bonds within 6 months from the date of transfer (sale).

iii) Required investment

- The whole or part of the capital gains can be invested. If the capital gains exceed the investment, the amount of capital gains as exceeds such investment shall be taxed.
- If the capital gains are equal to or less than the investment, the whole of such capital gains shall not be taxed.

iv) Maximum investment

- The maximum amount eligible for exemption is ₹50 lakh in a financial year. If your capital gain exceeds ₹50 lakh, the excess gain remains taxable.
- The investment made in the long-term specified bond from capital gain arising from transfer of one or more assets shall not exceed fifty lakh rupees -

(a) during any tax year; or

(b) in the year of transfer of the asset/assets and in the subsequent tax year.

v) Lock-in period

- The bonds must be held for 5 years.
- If the bond is transferred or converted into money within 5 years of its acquisition, the capital gains that was not taxed, shall be deemed to be income chargeable as long-term capital gains in the tax year of its transfer or conversion.
- Any loan or advance taken on the security of the bond shall be deemed to have converted the bond into money on the date of such loan or advance.

vi) The specified bond will not be eligible for section 80C (new section 123) benefit.

vii) Eligible bonds

- Bonds are issued by specified government-backed entities such as:
  - National Highways Authority of India
  - Rural Electrification Corporation Limited

Example:

Suppose -

Sale price of land: ₹1.2 crore
Indexed cost: ₹60 lakh
Long-term capital gain: ₹60 lakh

If you invest ₹50 lakh in eligible 54EC bonds within 6 months:

Exempt LTCG: ₹50 lakh
Taxable LTCG: ₹10 lakh

Frequently Asked Questions (FAQs)

1. Can I save capital gain tax on sale of land or building by investing in bonds?

Yes, long-term capital gains (LTCG) arising from the sale of land or building or both can be exempted by investing in specified bonds under Section 54EC (new section 85) of the Income Tax Act, subject to certain conditions.

2. Is the section 54EC exemption allowed under the new tax regime?

Yes, the Section 54EC exemption is allowed under the new tax regime. Capital gains tax exemptions are distinct from regular deductions and remain fully applicable regardless of whether you choose the old or new tax regime.

3. Can I claim both Section 54 and Section 54EC?

Yes, you can absolutely claim both Section 54 and Section 54EC exemptions simultaneously on the same property transaction.

Because these two provisions cover completely different types of reinvestments, you can combine them to maximize your tax savings—provided you do not claim the exact same rupee of capital gain twice.

4. Who can claim exemption under Section 54EC?

Under Section 54EC of the Income Tax Act, any taxpayer—including individuals, Hindu Undivided Families (HUFs), Non-Resident Indians (NRIs), companies, firms, and LLPs—can claim a tax exemption on Long-Term Capital Gains (LTCG) arising from the sale of land or buildings.

5. Which bonds are eligible for section 54EC exemption?

Currently, notified bonds issued by following PSU qualify for exemption under section 54EC.

National Highways Authority of India (NHAI)
Rural Electrification Corporation (REC)
Power Finance Corporation (PFC)
Indian Railway Finance Corporation (IRFC)
Housing and Urban Development Corporation (HUDCO)

6. Is it worth investing in 54EC bond?

Investing in a 54EC bond is highly recommended if you recently sold a long-term capital asset (like land or a building) and want to save on Long-Term Capital Gains (LTCG) tax without the hassle of buying another property. It offers a risk-free, government-backed route to avoid tax while generating a fixed and moderate return.

These bonds carry a 'AAA' rating and offer interest rate around 5.25% per annum (taxable).

While your principal avoids LTCG tax, the annual interest you earn is fully taxable as per your regular income tax slab (though no TDS is deducted).

If you are a conservative investor or are near retirement and prioritize safety and tax savings over high yields, the 54EC bond is a fantastic instrument.

7. What is the time limit to invest in section 54EC after sale of property?

You must invest the capital gains in eligible 54EC bonds within 6 months from the date of the property transfer (sale).

8. What is the maximum limit of exemption under section 54EC?

The maximum amount eligible for exemption is ₹50 lakh in a financial year. If your capital gain exceeds ₹50 lakh, the excess gain remains taxable.

9. Can I invest only the capital gain amount and not the entire sale consideration?

Yes. Under Section 54EC, you invest the capital gain amount. It is not necessary to invest the full sale proceeds.

10. What is the lock-in period for 54EC bonds?

The bonds have a 5-year lock-in period. Premature transfer, pledge, or loan against them shall result in withdrawal of the exemption.

11. Can NRIs invest in 54EC bonds?

Yes, NRIs can invest in 54EC bonds to save on long-term capital gains tax. These investments are subject to the same rules, limits, and conditions that apply to resident individuals.

12. Is the interest earned on 54EC bonds tax-free?

No. The interest received on these bonds is taxable according to the investor's applicable tax slab.

13. Is Section 54EC available for sale of shares or mutual funds?

No. The current provision applies to LTCG arising from transfer of land or building or both.

14. What happens if I miss the 6-month deadline?

The exemption under Section 54EC is not available if the investment is not made within the prescribed 6-month period from the transfer date.

15. What is the most common mistake taxpayers make under Section 54?

The three most common reasons for denial of Section 54EC exemption are:

Missing the 6-month investment deadline
Claiming exemption on the sale of ineligible assets such as shares or mutual funds
Redeeming or transferring the bonds during the 5-year lock-in period

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