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ITR: Section 54EC of the Income Tax Act, 1961

Section 54EC of the Income Tax Act, 1961

Section 54EC provides tax exemption on long-term capital gains (LTCG) arising from the transfer of any long-term capital asset if the gains are reinvested in certain specified bonds. Here are the key details about Section 54EC:

Eligibility:

  • Eligible Assessee: Any person (individuals, HUFs, companies, firms, etc.).
  • Asset Sold: Any long-term capital asset (held for more than 36 months).
  • Investment: Specified bonds notified by the government (e.g., bonds issued by NHAI or REC).

Conditions:

  1. Investment Time Frame: The investment in the specified bonds must be made within 6 months from the date of transfer of the original asset.
  2. Lock-in Period: The bonds have a lock-in period of 5 years. They cannot be sold, transferred, or converted into cash before the end of 5 years from the date of acquisition.
  3. Investment Limit: The maximum amount that can be invested in these bonds is ₹50,00,000 during any financial year.

Amount of Exemption:

  • The exemption amount is the lesser of the capital gains amount or the cost of the specified bonds.
  • If the entire capital gains amount is not utilized for the purchase of the specified bonds, the unutilized amount will be taxed as LTCG.

How to Claim Deduction Under Section 54EC in ITR Filing

Steps to Claim Deduction in ITR:

  1. Calculate Capital Gains:
    • Determine the full value of consideration received from the sale of the original asset.
    • Deduct expenses incurred exclusively in connection with such transfer.
    • Subtract the indexed cost of acquisition and indexed cost of improvement (if any).
  2. Utilize Capital Gains:
    • Invest the capital gains in specified bonds within the specified time frame (6 months).
  3. Filing ITR:
    • Select the appropriate ITR form (e.g., ITR-2 for individuals with capital gains).
    • Fill in the details of the original asset sold and the specified bonds purchased under the ‘Capital Gains’ section.
    • Mention the amount of capital gains and the amount claimed as deduction under Section 54EC.

Example:

Let’s assume you sold a long-term capital asset for ₹1,00,00,000 and the indexed cost of acquisition is ₹40,00,000. The long-term capital gain is ₹60,00,000. You invested ₹50,00,000 in specified bonds within 6 months from the date of transfer.

  • Capital Gains: ₹60,00,000
  • Amount Utilized for Specified Bonds: ₹50,00,000
  • Amount Not Utilized: ₹10,00,000 (this amount will be taxable as LTCG)

You can claim a deduction of ₹50,00,000 under Section 54EC, resulting in taxable capital gains of ₹10,00,000.

Filing Details in ITR:

  1. Schedule CG (Capital Gains):
    • Enter the details of the asset sold.
    • Calculate and enter the long-term capital gain.
    • Provide details of the specified bonds purchased.
    • Enter the amount of deduction claimed under Section 54EC.
  2. Schedule 54EC:
    • Provide details of the investment in specified bonds such as the date of investment, amount invested, and the issuing entity.

Summary:

  • Section 54EC allows tax exemption on long-term capital gains if reinvested in specified bonds.
  • Eligibility criteria, conditions, and the amount of exemption should be carefully considered.
  • The investment must be made within 6 months from the date of transfer of the original asset.
  • The bonds have a lock-in period of 5 years and an investment limit of ₹50,00,000 per financial year.
  • Proper details must be filled in the ITR form to claim the deduction.

This ensures that you can claim the appropriate deductions and comply with the tax regulations effectively.