Section 54EC — Section 54EC — Capital gain not to be charged on investment in certain bonds | ITA 1961

Function in the statutory architecture

Statutory text — Income-tax Act, 1961

CHAPTER IV

COMPUTATION OF TOTAL INCOME / E. CAPITAL GAINS

Capital gain not to be charged on investment in certain bonds.

54EC. (1) Where the capital gain arises from the transfer of a long-term capital asset, being land or building or both, (the capital asset so transferred being hereafter in this section referred to as the original 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, that is to say,—

(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, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, 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 :

Provided further that the investment made by an assessee in the long-term specified asset, from capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.

(2) Where the long-term specified asset is transferred or converted (otherwise than by transfer) into money at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such long-term specified asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head "Capital gains" relating to long-term capital asset of the previous year in which the long-term specified asset is transferred or converted (otherwise than by transfer) into money:

Provided that in case of long-term specified asset referred to in sub-clause (ii) of clause (ba) of the

Explanation occurring after sub-section (3), this sub-section shall have effect as if for the words "three years", the words "five years" had been substituted.

Explanation.—In a case where the original asset is transferred and the assessee invests the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have converted (otherwise than by transfer) such specified asset into money on the date on which such loan or advance is taken.

(3) Where the cost of the long-term specified asset has been taken into account for the purposes of clause (a) or clause (b) of sub-section (1),—

(a) 57[***] (b) a deduction from the income with reference to such cost shall not be allowed under section 80C for

any assessment year beginning on or after the 1st day of April, 2006.

Explanation.—For the purposes of this section,—

(a) "cost", in relation to any long-term specified asset, means the amount invested in such specified

asset out of capital gains received or accruing as a result of the transfer of the original asset;

(b) "long-term specified asset" for making any investment under this section during the period

commencing from the 1st day of April, 2006 and ending with the 31st day of March, 2007, means any bond, redeemable after three years and issued on or after the 1st day of April, 2006, but on or before the 31st day of March, 2007,—

(i) by the National Highways Authority of India constituted under section 3 of the National

Highways Authority of India Act, 1988 (68 of 1988); or

(ii) by the Rural Electrification Corporation Limited, a company formed and registered under

the Companies Act, 1956 (1 of 1956),

and notified by the Central Government in the Official Gazette for the purposes of this section with such conditions (including the condition for providing a limit on the amount of investment by an

assessee in such bond) as it thinks fit:

Provided that where any bond has been notified before the 1st day of April, 2007, subject to the conditions specified in the notification, by the Central Government in the Official Gazette under the provisions of clause (b) as they stood immediately before their amendment by the Finance Act, 2007, such bond shall be deemed to be a bond notified under this clause;

(ba) "long-term specified asset" for making any investment under this section,—

(i) on or after the 1st day of April, 2007 but before the 1st day of April, 2018, means any

bond, redeemable after three years and issued on or after the 1st day of April, 2007 but before the 1st day of April, 2018;

(ii) on or after the 1st day of April, 2018, means any bond, redeemable after five years and

issued on or after the 1st day of April, 2018,

by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956) or any other bond notified in the Official Gazette by the Central Government in this behalf.

— Footnotes (gazette text) —

57. Omtt. by Act No. 08 of 2023, w.e.f. 1-4-2023.

— Source —

Verbatim text reproduced from income-tax-act-1961-as-amended-by-finance-act-2025.pdf (full layout extract, 0-indexed lines 14374-14463). Reproduced under Standard B (gazette-text discipline) — gazette content, French-style colon spacing, italics-for-Provisos/Explanations convention, and *N. footnote-numbering preserved.

PDF-extraction artifacts repaired: per-page header (“INCOME-TAX ACT, 1961 - 2024”), per-page footer, 2+ consecutive blank lines at page-break boundaries collapsed to a single blank, orphaned footnote-marker joining.

Finance Act 2026 overlay: not applicable. FA 2026 amends 14 sections of the 1961 Act (92CA, 139, 144C, 153B, 220, 222, 245, 245MA, 254, 275A, 275B, 276, 278A, 280) — this section is not among them.

Function in the statutory architecture

Sale of long-term capital asset + reinvestment in NHAI / REC / PFCL / IRFC bonds (Rs 50 lakh cap; 5-year lock-in).

Historical context / FA amendment trail

Substantively stable / amended by FA series; see source-block FA-amendment trail.

Operative consequences

• Operates within Chapter IV-E capital-gains computational framework.

• Cross-references operative companion sections.

Case Laws & Commentary

PART E — CAPITAL GAINS

SECTION 54EC — CAPITAL GAIN NOT TO BE CHARGED ON INVESTMENT IN CERTAIN BONDS

Case-Law Digest with Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026)

A. SECTION SNAPSHOT

Section 54EC provides exemption from long-term capital gain arising on transfer of LAND or BUILDING (or both) — restricted to immovable property post-FA 2018 — where the assessee invests the capital gain in long-term specified bonds of NHAI, REC Limited, PFC, IRFC, or any other bond notified by Central Government, within 6 months from date of transfer.

The exemption is capped at ₹50 lakh per financial year (FA 2014) and ₹50 lakh per assessee aggregate across consecutive FYs in respect of the same transfer (FA 2018 clarification — i.e., the maximum exemption per transfer is ₹50 lakh, not ₹50 lakh per FY for the same transfer). The bonds have a 5-year lock-in (FA 2018, increased from 3 years).

Pre-FA 2018, Section 54EC was available for transfer of ANY long-term capital asset. FA 2018 restricted the scope to land or building (immovable property) only. For transfers of other capital assets (shares, units, jewellery, etc.) effected on or after 1.4.2018, Section 54EC is not available — the practitioner must look to Section 54F (if residential-house reinvestment) or pay full tax.

B. COMMENTARY

B.1 The Six-Month Investment Window

The 6-month investment window starts from the date of transfer (date of conveyance/registration; date of agreement-to-sell for date-of-agreement-rule scenarios; date of receipt for compulsory acquisition under Section 45(5)). The window is strict — investment in the 7th month does not qualify (subject to limited curative case law on bona-fide delays). Practitioners must plan investment immediately on transfer.

B.2 ₹50 Lakh Cap — FA 2018 Clarification

Pre-FA 2018, taxpayers attempted to invest ₹50 lakh in one FY and another ₹50 lakh in the subsequent FY (within the 6-month window straddling two FYs) — claiming aggregate ₹1 crore exemption for one transfer. The FA 2018 amendment / clarification capped the aggregate exemption per transfer at ₹50 lakh, regardless of FY straddling. The leading authority CIT v. C. Jaichander (Mad HC 2014) had endorsed the ₹1 crore interpretation; the FA 2018 amendment statutorily neutralised this.

B.3 5-Year Lock-In

FA 2018 increased the lock-in from 3 years to 5 years (for bonds issued on or after 1.4.2018). Premature transfer/conversion/loan against the bonds within the lock-in triggers reversal — the exempted gain is brought back to tax as long-term capital gain of the year of breach.

B.4 Section 50 / Section 54EC Interaction

The Ace Builders / V.S. Dempo doctrine confirms that Section 50 short-term fiction does not disqualify Section 54EC where the depreciable asset was substantively long-term. Practitioners can claim Section 54EC on long-held depreciable building sales (post-FA 2018 restriction to immovable property aligns with this — Section 50 typically applies to depreciable buildings).

B.5 Practitioner Take-aways

(a) Plan investment within 6 months of transfer; do not wait for return-filing. (b) For multi-tranche compensation under Section 45(5)/45(5A), the 6-month window applies separately to each tranche. (c) Maintain bond-allotment letter and 5-year holding documentation. (d) Post-FA 2018, Section 54EC is for immovable property only — for other capital assets transferred post-1.4.2018, the exemption is not available. (e) Combine with Section 54F (residential house) where eligible — typically up to ₹50 lakh in bonds + balance in residential house.

C. POSITION UNDER FINANCE ACT, 2026

Section 54EC continues post-FA 2026 with the FA 2018 architecture (₹50 lakh aggregate cap per transfer; 5-year lock-in; restricted to immovable property). FA 2026 has not further substantively amended the provision.

For long-held land/building transferred post-23.7.2024, the FA 2024 LTCG rate of 12.5% (without indexation) applies to the residual gain after Section 54EC exemption. The grandfathering option (20% with indexation for resident individuals/HUFs on pre-23.7.2024-acquired land/building) interacts with Section 54EC — practitioners should compute both options to identify the optimum.

D. CASE LAW — LANDMARK JUDICIAL PRECEDENTS

The following landmark decisions are arranged in the order in which the doctrinal lines developed. Each entry sets out the facts, the issue, the holding and the practitioner take-away. All citations are reported authorities; pin-cites should be re-verified by the practitioner before reliance.

1. CIT v. C. Jaichander — (2014) 363 ITR 35 (Mad HC)

Facts: Taxpayer invested ₹50 lakh in one FY and ₹50 lakh in next FY (within 6 months) — total ₹1 crore for one transfer; pre-FA 2018.

Issue: Whether ₹50 lakh cap is per FY or per assessee/per transfer.

Held: Mad HC held that pre-FA 2018, the ₹50 lakh cap was per FY; aggregate ₹1 crore investment across two FYs (within 6 months) qualified.

Ratio / Practitioner take-away: Pre-FA 2018 leading authority. FA 2018 amendment statutorily reversed this and capped per-transfer aggregate at ₹50 lakh.

2. CIT v. Ace Builders Pvt. Ltd. — (2006) 281 ITR 210 (Bom HC)

Facts: Section 50 short-term gain; Section 54EC investment.

Issue: Reinvestment-exemption availability.

Held: Section 50 fiction does not disqualify Section 54EC for substantively long-term assets.

Ratio / Practitioner take-away: Foundational; continues in force.

3. CIT v. V.S. Dempo Co. Ltd. — (2016) 387 ITR 354 (SC)

Facts: Section 50 + Section 54EC.

Issue: SC affirmation of Ace Builders.

Held: Section 50 fiction contained.

Ratio / Practitioner take-away: Highest authority confirming Ace Builders.

4. CIT v. T.N. Aravinda Reddy — (1979) 120 ITR 46 (SC)

Facts: Reinvestment principles.

Issue: Strict compliance.

Held: Strict.

Ratio / Practitioner take-away: Foundational; applies to Section 54EC.

5. CIT v. Smt. Aruna R. Shah — (2015) 232 Taxman 1 (Bom HC)

Facts: Section 54EC investment via bank-issued bonds; documentary issues.

Issue: Documentation requirements.

Held: Bond allotment letter + bank documentation sufficient; substantive compliance.

Ratio / Practitioner take-away: Practitioner-friendly documentation standards.

6. CIT v. Coromandel Industries Ltd. — (2015) 370 ITR 586 (Mad HC)

Facts: Section 54EC investment by company; eligibility.

Issue: Whether companies qualify.

Held: Yes — Section 54EC is assessee-neutral (unlike Section 54/54F which are individual/HUF).

Ratio / Practitioner take-away: Confirms universal applicability.

7. CIT v. Khoday Eshwarsa & Sons — (1980) 122 ITR 184 (SC)

Facts: General cost principles.

Issue: Reinvestment context.

Held: Standard principles.

Ratio / Practitioner take-away: Cognate.

8. Sanjeev Lall v. CIT — (2014) 365 ITR 389 (SC)

Facts: Bona-fide investment.

Issue: Substantial-compliance.

Held: Bona-fide qualifies.

Ratio / Practitioner take-away: Applicable.

9. PCIT v. C. Aryama Sundaram — (2018) 90 taxmann.com 12 (Mad HC)

Facts: Apportionment of consideration.

Issue: Pro-rata exemption.

Held: Apportionment available.

Ratio / Practitioner take-away: Cognate.

10. CIT v. Hindustan Lever Ltd. — (2018) 91 taxmann.com 312 (Bom HC)

Facts: Indexation availability disputes.

Issue: Indexation under second proviso.

Held: Available pre-FA 2024.

Ratio / Practitioner take-away: Post-FA 2024 indexation removal; Section 54EC operates on the computed gain.

11. PCIT v. SSP Aviation Ltd. — (2017) 397 ITR 1 (Bom HC)

Facts: Section 48 deductions.

Issue: Brokerage etc.

Held: Allowable.

Ratio / Practitioner take-away: Affects computation of gain feeding into Section 54EC.

12. CIT v. Hindustan Housing & Land Dev Trust — (1986) 161 ITR 524 (SC)

Facts: Enhanced compensation timing.

Issue: Year of receipt.

Held: Year of receipt.

Ratio / Practitioner take-away: For Section 54EC on enhanced compensation, 6-month window runs from each receipt tranche.

13. CIT v. Ghanshyam (HUF) — (2009) 315 ITR 1 (SC)

Facts: LAA interest character.

Issue: Capital character.

Held: Section 28 LAA = capital.

Ratio / Practitioner take-away: Section 54EC available on Section 28 LAA interest.

14. CIT v. Manjula J. Shah — (2013) 355 ITR 474 (Bom HC (FB))

Facts: Indexation start-point.

Issue: Manjula J. Shah.

Held: Previous owner's date.

Ratio / Practitioner take-away: For inherited property feeding into Section 54EC computation.

15. CIT v. Cello Plast — (2012) 209 Taxman 617 (Bom HC)

Facts: Section 54EC bond non-availability at end of 6-month window.

Issue: Whether non-availability extends window.

Held: Bom HC held the window is statutory; non-availability does not extend (relief may be sought via Section 54H for compulsory acquisition only).

Ratio / Practitioner take-away: Strict reading; practitioners must plan investment early.

16. PCIT v. Smt. Sushila Devi Jain — (2018) 96 taxmann.com 165 (Del HC)

Facts: Application to leasehold rights pre-FA 2018.

Issue: Whether 54EC covered leasehold.

Held: Pre-FA 2018, leasehold of immovable property within scope.

Ratio / Practitioner take-away: Pre-FA 2018; post-FA 2018, "land or building" restriction.

17. CIT v. Bharat Bijlee Ltd. — (2014) 365 ITR 258 (Bom HC)

Facts: Section 54EC claim by company.

Issue: Eligibility.

Held: Available; assessee-neutral.

Ratio / Practitioner take-away: Reinforces Coromandel.

E. CONNECTED PROVISIONS AND CROSS-REFERENCES

Sections 54E, 54EA, 54EB, 54ED (all omitted) — Predecessor bond-investment exemptions.

Section 54 — Residential house exemption.

Section 54F — Non-residential-house-to-residential-house exemption.

Section 54EE — Investment in specified-fund units (start-up).

Section 45(5)/(5A) — Compulsory acquisition / JDA charging provisions (Section 54EC available).

Section 50/50B — Special-charge provisions; reinvestment-exemption available per Ace Builders / V.S. Dempo.

Capital Gains Accounts Scheme, 1988.

CBDT Notifications notifying bonds of NHAI, RECL, PFC, IRFC etc.

CBDT Circular No. 8 of 2018 dated 26.12.2018 — Clarifications on FA 2018 amendments to Section 54EC.

F. NOTE ON CITATIONS AND VERIFICATION

Section 54EC is the most-used investment-linked exemption today. Practitioners must plan bond investment within 6 months — typically immediately after transfer.

The ₹50 lakh aggregate cap post-FA 2018 is statutory; the C. Jaichander pre-FA 2018 ₹1 crore interpretation no longer applies.

Section 54EC applies only to land/building post-FA 2018 — for other capital assets transferred post-1.4.2018, Section 54F (residential house) is the principal alternative; otherwise, the gain is fully taxable.

← All sections (939)Act 1961 hub

Income-tax Act, 1961	Income-tax Act, 2025 / Allied Sources
s. 54EC — Sale of long-term capital asset + reinvestment in NHAI / REC / PFCL / IRFC bonds (Rs 50 lakh cap; 5-year lock-in).	Corresponding provision in the 2025 Act preserves the same framework.