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

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.

📚 Table of Contents

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• What is Section 54EC?
• What are the applicable conditions?
• Which are the eligible bonds?
• Some worked out calculations
• Should you take Sec 54EC exemption?

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
• 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 capital gains tax any more
• this works in both old and new tax regimes
• Section 54EC applies to both resident Indians and NRIs

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.

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

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.

Read more here: Budget 2024: A Surprise in Real Estate Sales due to Indexation Benefit Removal: Is it good or bad?

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 using Section 54

Here is an article discussing using the house sale amount in an effective way for buying a new house: Can You Buy a House with EMI Equal to Rent? Here’s How