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How Section 54EC helps you save tax when you sell property

Posted on 14 Aug 2022 • Updated on: 23 Jul 2024
Author: Sayan Sircar

Tags: Tax

6 mins read
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This article discusses the Section 54EC exemption available for property sale: conditions applicable and worked-out examples.

How Section 54EC helps you save tax when you sell property

Originally published: 14-Aug-2022

Updated: 23-Jul-2024 - indexation removed and LTCG rate reduced in Union Budget 2024

Disclaimer: Taxation is a dynamic concept, and the content of this article is valid on the date of publication and any subsequent updates. Always consult a professional tax advisor before doing anything that leads to taxes being due.

What is Section 54EC

Under Section 54EC, you can save long-term capital gains (LTCG) tax if you have sold immovable property like land or buildings.

The logic here is like this:

you sell a property and make, say 20 lakhs profit, post indexation adjustment
usually, you would be liable to pay LTCG tax on that 20 lakhs after adjusting for indexation
instead of paying the tax, you invest the 20 lakhs in certain bonds under Sec 54EC.
these bonds pay out interest at around 5%, which is taxable at the slab rates
you will get back 20 lakhs after 5 years, and there is no tax any more
this works in both old and new tax regimes

What are the applicable conditions?

The following conditions must be fulfilled to apply Section 54EC

the property must be sold after holding it for at least 24 months
the maximum that can be invested in Sec54EC bonds is ₹50 lakhs per property sale
the interest you receive over five years is taxable at slab
you cannot exit the bond investment before the five years is complete since they are not traded on the stock exchange
the bonds must be purchased within six months from the date of sale deed registration
these bonds can be purchased from KFintech and SHCIL website online and bank branches offline

Note: If you sold the property before 24 months, the capital gains are called short-term (STCG) and are taxed at your current slab rates. The entire profit gets added to your taxable income, and you pay tax at the highest rate applicable to you, which could be 30% or more.

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Which are the eligible bonds?

54EC eligible bonds are issued to fund infrastructure projects by issuers like REC, NHAI, PFC and IRFC, amongst others:

REC: Rural Electrification Corporation Limited
NHAI: National Highway Authority of India
PFC: Power Finance Corporation Limited
IRFC: Indian Railway Finance Corporation Limited

These issuers are government-backed, with minimal risk of not getting back the money at the end of five years. Investing in these bonds gives you a tax benefit while the project gets cheap funding. It is a win-win for both parties.

Also read
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Some worked out calculations

Important: In a surprise move, Union Budget 2024 removed the concept of indexation and dropped the capital gains tax rate from 20% for 12.5% for all property sales on or after 23-Jul-2024. Section 54EC exemption has not been touched.

We are using the CII table from here for the calculation of LTCG. You will find additional worked-out examples and ways to combine capital gains with income in this article: How to calculate taxes from capital gains and combine them with your other income.

We take the example of an apartment purchased in 2010 and sold in 2018:

the Purchase value is ₹15 lakhs
the Sale value is ₹40 lakhs
CII at purchase is 167, CII at sale time is 280
Indexed purchase price is ₹15 * (280/167) = ₹25.15 lakhs
LTCG = ₹40 - ₹25.15 = ₹14.85 lakhs (if sold after 23-Jul-2024, LTCG will be 40-15=25 lakhs)
54EC bond investment = ₹14.85 lakhs (if sold after 23-Jul-2024, 54EC investment will be 25 lakhs)
LTCG tax on residual property sale amount is zero
Interest per year at 5% on bonds: pre-tax ₹74,250 on ₹14.85 lakhs for five years (5% on ₹25 lakhs = ₹1.25 lakhs pre-tax if the property was sold after 23-Jul-2024)
Maturity amount = ₹14.85 lakhs tax-free (₹25 lakhs if the property was sold after 23-Jul-2024)

We will now take an example where the LTCG is more than 50 lakhs:

the Purchase value is ₹60 lakhs
the Sale value is ₹160 lakhs
CII at purchase is 167, CII at sale time is 280
Indexed purchase price is ₹60 * (280/167) = ₹100.60 lakhs
LTCG = ₹160 - ₹100.60 = ₹59.40 lakhs (if sold after 23-Jul-2024, LTCG will be 160-60=100 lakhs)
54EC bond investment = ₹50 lakhs
LTCG tax on residual property sale amount ₹9.4L at 20% = ₹1.88L (if sold after 23-Jul-2024, LTCG tax 12.5% on 9.4 lakhs = ₹1.175 lakhs)
Interest per year at 5% on bonds: ₹2.5L (pre-tax) for five years
Maturity amount = ₹50 lakhs (tax-free) after five years

Should you take Sec 54EC exemption?

So far, the concept of Sec54EC tax exemption is reasonably rosy for the investor:

LTCG saving @20% on the gains
the interest on the bond investment, albeit taxable
Capital protection on the bonds

However, there is an opportunity cost as well, namely what you could have done with the gains after the tax instead of locking it up for five years. We will only talk about the first 50 lakhs of LTCG since that is the 54EC exemption limit; above that, it is taxable:

Case 1: invest X lakhs (X<=50) in 54EC bonds, get 3.5% (at 30% slab) interest per year on X for five years, and get X lakhs back after five years
Case 2: pay 20% tax on X, invest the remainder in long-term investments like equity
Case 3: purchasing a new property and saving the entire capital gains amount from tax

We will discuss this topic in more detail in a future article.

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