« Do not make these common mistakes while buying a term insurance policy How can children help their retired parents to set up their finances? »

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

Posted on 14 Aug 2022
Author: Sayan Sircar

Tags: Tax

5 mins read
📢Join 2300+ readers on WhatsApp and get new post notifications!

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

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 anymore
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.

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

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.

Some worked out calculations

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
54EC bond investment = ₹14.85 lakhs
LTCG tax on residual property sale amount is zero
Interest per year at 5% on bonds: ₹74,250 (pre-tax) for five years
Maturity amount = ₹14.85 lakhs (tax-free)

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
54EC bond investment = ₹50 lakhs
LTCG tax on residual property sale amount ₹9.4L at 20% = ₹1.88L
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.

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

To understand how this article can help you:

If you have a comment or question about this article

The following button will open a form with the link of this page populated for context:

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Discover an article from the archives

Worked out case studies for goal-based investing

Case study: how can this middle-aged investor with two children plan for retirement and children's goals?

This article shows how a single-income middle-aged couple with two small children reach their retirement and children’s goals.
Case study: can this double income single kid family reach FIRE at 50?

This article shows how a double-income couple with a 2-year old reach their FIRE dream at the age of 50.
Case study: how a family in their mid-30s with a newborn kid can FIRE and invest in real estate?

This article shows how a double-income couple with a newborn child can invest for their future goals of FIRE and real-estate investment.
Case study: how this double income recently married family can perform DIY goal-based investment planning

This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
Case Study: How should couples in their 40s with a new baby plan their financial future?

Did you welcome a bundle of joy in your 40s? This article will discuss ways of planning the child’s (and your’s financial future)
Case study: how this double income single kid family can perform DIY goal-based investment planning

This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.

Previous and next articles:

Insurance

Do not make these common mistakes while buying a term insurance policy

This article discusses some common mistakes people should avoid while buying term insurance.

Published: 10 August 2022

9 MIN READ

<p>This article shows the steps to set up an investment portfolio for retirees with the help of their children.</p>

Retirement Portfolio Construction Pension

How can children help their retired parents to set up their finances?

This article shows the steps to set up an investment portfolio for retirees with the help of their children.

Published: 17 August 2022

11 MIN READ

Latest articles:

<p>This article shows how to understand the impact on your portfolio if you stop investing for a few years between today and retirement.</p>

Portfolio Construction

How much lower portfolio value do you end up with if you do not invest for a few years in between?

This article shows how to understand the impact on your portfolio if you stop investing for a few years between today and retirement.

Published: 24 April 2024

4 MIN READ

<p>This article explains what happens if you withdraw from your EPF to buy a house and who should or shouldn’t withdraw from EPF for this reason.</p>

House Purchase

Should you withdraw from your EPF to buy a house?

This article explains what happens if you withdraw from your EPF to buy a house and who should or shouldn’t withdraw from EPF for this reason.

Published: 21 April 2024

7 MIN READ

Topics you will like:

Asset Allocation (21) Basics (8) Behaviour (12) Budgeting (12) Calculator (25) Case Study (6) Children (17) Choosing Investments (40) FAQ (12) FIRE (13) Gold (21) Health Insurance (5) House Purchase (29) Insurance (16) International Investing (12) Life Stages (2) Loans (17) Market Data (7) Market Movements (16) Mutual Funds (46) NPS (7) NRI (19) News (18) Pension (8) Portfolio Construction (53) Portfolio Review (27) Reader Questions (8) Real Estate (7) Research (5) Retirement (38) Review (15) Risk (6) Safe Withdrawal Rate (5) Set Goals (28) Step by step (15) Tax (59)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.