Section 54EC of ITA, 1961 : Section 54Ec: Capital Gain Not To Be Charged On Investment In Certain Bonds

Explanation using Example

Imagine Mr. Sharma sells his ancestral property, which is a piece of land he has owned for 15 years, for Rs. 1 crore. This results in a long-term capital gain of Rs. 50 lakhs after accounting for the indexed cost of acquisition. To save on capital gains tax, he decides to invest Rs. 50 lakhs in bonds issued by the National Highways Authority of India, which are specified as long-term specified assets under Section 54EC of the Income Tax Act.

Since Mr. Sharma invested the entire capital gain amount into these bonds within six months of selling the land, according to Section 54EC(1)(a), he does not have to pay any tax on the capital gains. However, there are two important conditions he must follow:

1. The investment in the bonds must not exceed Rs. 50 lakhs in a single financial year, which he has complied with.
2. He must hold these bonds for at least three years (or five years for bonds issued after April 1, 2018). If he sells the bonds or takes a loan against them before this period, the capital gains tax exemption will be revoked, and he will have to pay tax on the capital gains in the year in which he sells the bonds or takes the loan.

By following these rules, Mr. Sharma is able to defer the tax on his capital gains legally.