Tax Benefits for Section 54EC Exemption on Depreciated Properties: Navigating the Tax Code

Tax Exemption for Depreciable Business Property under Section 54EC

Key Findings:

• A taxpayer who sold a business property after claiming depreciation for decades may still claim Section 54EC exemption.
• Section 50C of the Income Tax Act treats profits realized on sale of depreciable assets as short-term capital gains, but does not change the asset's status as a long-term capital asset.
• Section 2 defines long-term and short-term capital assets based on holding period, not depreciation claims.

Analysis:

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The Income Tax Act's deeming provisions, as interpreted by the Supreme Court in CIT v. V.S. Dempo Company Ltd., do not preclude taxpayers from claiming Section 54EC exemption on long-term capital assets that have been depreciated. This exemption is available for investments in capital gains bonds of specified financial institutions within six months from the date of sale.

Regulatory Update:

The upcoming Section 85 of the Income Tax Act, 2025, effective from 1st April 2026, uses the phrase "long-term capital gains" instead of "Long-term Capital Asset." This change closes the loophole for depreciable assets, but taxpayers can still claim exemption under Section 54EC for transfers completed before 31st March 2026.

Conclusion:

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Taxpayers who have sold depreciated business properties may still claim Section 54EC exemption, subject to the regulatory update effective from 1st April 2026.