Pre-requisites of Exemption under section 54E

Provisions of Section 54EC of Income Tax Act:

Section 54EC of Income Tax Act gives the option to an assessee to save tax on capital gain arising out of transfer of long term capital asset if certain conditions are fulfilled. Provisions of section 54EC of the Act are generally used for the benefit of the people.

Conditions for availing of the exemption under Section 54EC:

1.       The asset which is transferred has to be a long term capital asset and there must be a long term capital gain.

2.        Such capital asset has to be transferred after 1^st April, 2000 by the assessee.

3.       The section requires that the investment has to be made within 6 months from the date of capital gain.

If 6 months belong to two successive financial years, the provisions of section 54EC is clear on this point and it says that the assessee can invest in two different years if in a financial year the investment is not more than Rs. 50 lakhs.

The benefit of section 54EC can be availed by an assessee irrespective of whether the computation of capital gains is done under sections 48 and 49 or under section 50 of the Income Tax Act. This is due to the fact that section 50 of the Act does not convert a long-term capital asset into a short term capital asset.

The cost of those long term assets which are eligible for exemption under section 54EC shall not be eligible for deduction under section 80C of the Act. In other words, the investment made in bonds under section 54EC is not eligible for deduction under section 80C.

Amount of deduction:

The capital gain is eligible to exemption under section 54EC only if the same is invested in the long term specified assets within 6 months from the date of the transfer. For example, if a long term capital gain arises amounting to Rs. 10 lakhs and bonds under section 54EC are purchased amounting Rs. 8 lakhs, capital gain of Rs. 8 lakhs will be eligible for exemption under section 54EC and the assessee will be liable to pay tax for remaining capital gain of Rs. 2 lakhs.

Extent of investment:

Since 1^st April, 2007, the investments in the long term specified capital asset i.e bonds under section 54EC during any financial year cannot be more than Rs. 50, 00,000. Hence investment in bonds in a financial year can be made only up to Rs. 50 Lakhs. The investment is to be made with in six months of sale of capital asset. If these six months fall in two financial years, you may deposit 50 lacs in two years and thus get rebate of 1 Cr. You may refer to supreme court judgment as referred to in this site in other articles

Locking period:

If an investment is made under section 54EC in specified bonds, the same cannot be transferred or converted into money within three years from the date of their acquisition failing which the amount of capital gain exempted under section 54EC will be considered as long-term capital gain of the previous year in which such bonds are transferred.