If you have sold land or a building and made a long-term capital gain, you can reduce your tax liability by investing the capital gain in specified bonds under Section 54EC of the Income-tax Act, 1961.
The provision allows eligible taxpayers to claim an exemption, subject to investment limits, deadlines, and holding-period conditions.
Under the Income-tax Act, 2025, which came into effect on April 1, 2026, the corresponding provision is covered under Section 85, relating to capital gains tax exemption on investment in specified bonds, but all the key conditions remain the same.
What is the Section 54EC tax exemption?
Section 54EC allows an individual or other eligible taxpayer to claim an exemption on long-term capital gains arising from the transfer of land, a building, or both by investing the gains in specified bonds.
The exemption applies to the amount invested, rather than the entire sale proceeds. If you invest only part of it, the exemption is restricted to the amount invested.
For example, suppose you sell a plot and earn a long-term capital gain of ₹30 lakh after 24 months of holding. If you invest ₹20 lakh in eligible Section 54EC bonds within the prescribed period, you can claim an exemption of ₹20 lakh, while the remaining ₹10 lakh remains taxable.
Which bonds qualify for the exemption?
The specified bonds must be issued by the National Highways Authority of India (NHAI), the Rural Electrification Corporation (REC), or another issuer whose bonds are notified by the Central Government for this purpose.
For investments made on or after April 1, 2018, the bonds must have a redemption period exceeding five years.
How much can you invest and what is the deadline?
You must invest the eligible capital gain within six months from the date of transfer of the original land or building.
The exemption is subject to a maximum investment limit of ₹50 lakh. The aggregate investment from capital gains arising from one or more asset transfers cannot exceed ₹50 lakh during the financial year of transfer and the subsequent financial year under Section 54EC of the 1961 Act.
This ₹50 lakh limit is a cumulative ceiling per taxpayer across one or more asset transfers within that timeframe. Taxpayers should account for investments across both relevant financial years when calculating the maximum exemption.
What happens if you sell the bonds early?
The specified bonds cannot be transferred or converted into money within five years of acquisition for investments covered by the rules applicable from April 1, 2018. If this condition is breached, the exemption previously claimed becomes taxable in the year of the breach.
Taking a loan or advance against the bonds also triggers the rule treating them as converted into money. Before investing, check the applicable provisions, eligible bond issues, and your final capital gains calculation.
Disclaimer: This is for informational purposes only. Consult a qualified tax professional for advice specific to your circumstances.