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nism-series-xb-section-54ec-bonds-capital-gains-exemption[ INVESTMENT ADVISER (LEVEL 2) ]

An investor realizes an LTCG of ₹75,00,000 on the sale of commercial land. The investor invests the statutory maximum limit in Section 54EC capital gains bonds (REC/PFC/NHAI) within 6 months. What is the maximum Section 54EC exemption and net taxable gain?

[ A ]Exemption = ₹75,00,000; Net Taxable LTCG = ₹0 (Exemption is unlimited)

[ B ]Exemption = ₹10,00,000

[ C ]Exemption = ₹50,00,000 (statutory maximum cap); Net Taxable LTCG = ₹25,00,000[ CORRECT ]

[ D ]Exemption = ₹0 (Commercial land cannot use Section 54EC)

Takeaway

Option C is correct: Exemption = ₹50,00,000 (statutory maximum cap); Net Taxable LTCG = ₹25,00,000

Derivation

Section 54EC lets a taxpayer shelter long-term capital gains from land or building by investing the gain in specified bonds (REC, PFC, NHAI, IRFC) within 6 months of transfer, subject to a mandatory 5-year lock-in, but the exemption is not open-ended: it is capped at ₹50,00,000 per financial year regardless of how large the underlying gain is. Here the investor invests the statutory maximum, so the exemption available is ₹50,00,000, not the full ₹75,00,000 gain. Net Taxable LTCG = ₹75,00,000 − ₹50,00,000 = ₹25,00,000, which remains taxable in the investor's hands. The exam frequently tests whether candidates assume the full gain is sheltered simply because a qualifying bond investment was made, missing that the exemption itself has a hard rupee ceiling.

Why the others fail

A — Exemption = ₹75,00,000; Net Taxable LTCG = ₹0 (Exemption is unlimited)

Section 54EC caps the exemption at ₹50 Lakhs per financial year across all eligible bond issues combined; it is not an unlimited exemption regardless of the gain size.

B — Exemption = ₹10,00,000

Understates the statutory ceiling by a wide margin; Section 54EC actually permits exemption up to ₹50 Lakhs per financial year, five times this figure.

D — Exemption = ₹0 (Commercial land cannot use Section 54EC)

Section 54EC applies to long-term capital gains from any land or building, commercial or residential, so commercial land is fully eligible for this exemption.