Taxes can drain out an investor’s annual earnings. Tax Planning is a legitimate tool to reduce tax liabilities while conforming to the legal obligations and hence, tax planning comes as an effective tool in financial planning.

54EC bonds, or capital gains bonds, are one of the best ways to save long-term capital gain tax. 54EC bonds are specifically meant for investors earning long-term capital gains and would like tax exemption on these gains.

The nomenclature of the financial instrument i.e., 54 EC accrues to the fact that these bonds are those assets which enables long term capital gains exemption under Sec54 EC of the Income Tax Act,1961. So, in order to understand what this financial instrument is all about, its crucial to know more about the Sec 54 EC.

What is Sec 54EC of the Income Tax Act,1961?

Where the capital gain arises from the transfer of a long-term capital asset 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 asset, the capital gain shall be dealt with in accordance with the following provisions of this section —

(a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under Section 45;

(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, the cost of acquisition of the long-term specified asset shall not be charged under Section 45.

Provided that the investment made on or after the 1st day of April 2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees.

An example to illustrate.

Point (a)-

Cost of long-term specified asset ₹ 50,00,000 Capital Gain arising from sale of land/building ₹ 30,00,000 Capital gains eligible for exemption from Sec 45 ₹ 30,00,000

Cost of long-term specified asset ₹ 50,00,000 Capital Gain arising from sale of land/building ₹ 30,00,000 Capital gains eligible for exemption from Sec 45 ₹ 30,00,000