Investing your capital gain amount in Bonds under section 54EC still a good option to save capital gain tax?

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Section 54EC was introduced from 01.04.2001 as a section to provide deduction from capital gain earned on any long term capital asset. It was popular section in its earlier days because all other sections were there for some specific type of asset whereas only section 54EC and section 54F covered any asset other than land and building. Also in both of them section 54EC was more useful because in section 54EC you only need to invest capital gain amount whereas in section 54F you get proportionate deduction of capital gain amount i.e. deduction from capital gain depends on proportion of sale consideration invested in new asset. Various bonds listed in section 54EC are Bonds issued by the National Highways Authority of India, Rural Electrification Corporation, Power Finance Corporation Limited and Indian Railway Finance Corporation.

However now after various amendments made by the government in recent budget’s section 54EC has lost it’s charm. Some important points in this regard are:

1. One can only claim deduction from capital gain by investing in bonds if the asset sold is long term and is a land or building or both. Whereas earlier it was available for any long term asset.

2. The lock in period has been increased from 3 years to 5 years. The return on such bonds are around 5.75% which is taxable every year but then also earlier people used to invest in these bonds because the lock in period was same as other sections but by increasing the lock in period has reduced it’s popularity.

3. The deduction under section 54EC was assessee wise and not asset wise therefore even if in a financial year you sell 2 assets you can only claim 50 lakh exemption and it was made more strict by introducing a proviso which says that a person can invest only 50 lakh, with regard to any number of asset sold in a financial year, in that financial year and subsequent financial year. Let’s understand this with an example:

Suppose you sell a land in June 2018 and sell another building in Feb 2019. You invest 30 lakh in section 54EC against sale of land in December 2018, now you can invest only Rs. 20 lakh against sale of building either in FY 2018-19 or in FY 2019-20. However if you sell another land in FY 2019-20 then maximum investment that you can do in FY 2019-20 is Rs. 70 lakh.

This cap of Rs. 50 lakh which now covers two financial year has also added to making this section less popular.

According to me the above 3 points have contributed the most in making this section less popular in the eyes of investors. I don’t understand why government is demotivating individuals from investing in their bonds.

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