Where the capital gain arises from transfer of long-term capital asset being land or building or both, and the assessee has, at any time within a period of six months after the date of such transfer invested the whole or any part of capital gains, in the ‘long-term specified assets’, then the capital gain shall be dealt with in accordance with the following provisions of section –
- If the cost of the “long-term specified asset” is not less than the capital gain arising from transfer of asset, the whole of such capital gain shall not be charged u/s 45.
- For Example – Cost of Specified asset is Rs 50 Lakh and Capital Gain is of Rs 40 Lakh, Whole of Rs 40 Lakh shall not be charged to Capital Gains.
- If the cost of the long-term specified asset” is less than the capital gain arising from the transfer of asset, the the cost of acquisition of the “long-term specified asset” shall not be charged u/s 45.
- For Example- Cost of Specified asset is Rs 50 Lakh and Capital Gain is of Rs 75 Lakh, Rs 50 Lakh shall not be charged to Capital gains and balance Rs 25 lakh shall be chargeable.
Provided that the investment made in the long-term specified asset by an assessee during any fiancial year does not exceed Rs 50 Lakh.
Provided further that the investment made by an assessee during the financial year in which the asset or assets are transferred and in the subsequent financial year does not exceed Rs 50 Lakh.
Here are some of the key points from the Section –
1. The deduction u/s 54EC is restricted to only transfer of Land or building or both by Finance Act 2018. It is available to all assessees.
2. The Finance Act 2017 provides that in case of an immovable property being land or building or both, the period of holding should be 24 months or more to qualify as long-term capital asset.
3. “Long-term specified asset” for making any investment u/s 54EC means any bond redeemable after five years and issued by National Highways Authority of India (NHAI) or by Rural Electrification Corporation Limited or any other bond notified by central government.
4. Finance Act 2018 has extended the time period to 5 years , earlier it was 3 years only.
5. An assessee can not claim deduction of more than Rs 50,00,000 of investment made during financial year including investment made in subsequent financial year.
Example: Mr A purchase a house property on 01.04.2001 for Rs 5,00,000. He sells the house on 10.12.2018 for Rs 2,00,00,000. He purchases bonds of NHAI which are redeemable after 5 Years as under: –
(i) On 15.03.2019 – Rs 50,00,000 (FY 2018-19)
(ii) On 15.04.2019 – Rs 50,00,000 (FY 2019-20)
In the above example, The capital gain for Assessment Year 2019-20 shall be as under :
Period of Holding (2001 to 2018) : Long-term
|Sale Price of Asset||2,00,00,000|
|Less: Indexed Cost of Acquisition(5,00,000 X 280/100)||14,00,000|
|Long-term Capital Gains||1,86,00,000|
|Less: Deduction u/s 54EC||50,00,000|
|Net Long term Capital Gains||1,36,00,000|
As shown in example, assessee has tried to take double benefit of section 54EC by investing the amount in two different financial years but within six month after the date of transfer. But this planning is nullified by the Second Proviso u/s 54EC.
Finance Act 2018 also provide that if the assessee transfer long-term specified asset or takes any loan or advance on the security of such long-term specified asset within the period of 5 years from the date of acquisition of long-term specified asset, the capital gains arising from the transfer earlier not charged u/s 45 on basis of the cost of “long-term specified asset” shall be deemed to be the income chargeable under the head “Capital Gains” of the Previous year in which the “long-term specified assets” is transferred or converted into money.
For Example in the above case if the Assessee transfers long-term specified asset of Rs 50,00,0000 on let say in the year 2020 which is within 5 year, in that case in the assessment year 2021-22, the Rs 50,00,000 shall be deemed to be income under the head Capital Gains.
Note: Section 45 is the charging section of Capital Gains and it provides as under:
“Any profit and gains arising from transfer of capital asset effected in the previous year shall be chargeable to income-tax under the head capital gains in the previous year in which transfer took place.”