Section 54EA of the Income-tax Act, 1961: Capital Gains Exemption on Specified Securities
Section 54EA provided relief from long-term capital gains tax where net sale consideration was invested in notified securities. Its scope is historical: the principal rule applies to transfers made before 1 April 2000, not to ordinary transfers taking place today.
What was Section 54EA?
Section 54EA was inserted with effect from 1 October 1996. It covered capital gains arising from a long-term capital asset transferred before 1 April 2000, subject to reinvestment of all or part of the net consideration within six months after the transfer. The eligible investment had to be in securities notified by the Central Board of Direct Taxes for this purpose.
Long-term capital asset means an asset that meets the holding-period test under the capital gains law applicable to the transfer. Net consideration means the full sale consideration less expenditure incurred wholly and exclusively in connection with the transfer. Specified securities under this provision included notified bonds, debentures, public-company shares and units of eligible mutual funds, as defined by the law and relevant notifications.
How was the exemption calculated?
If the amount invested in specified securities was at least the net consideration, the full eligible capital gain was exempt. If less was invested, exemption was proportionate:
Exempt capital gain = Capital gain x (eligible investment / net consideration).
| Illustrative figures | Amount |
|---|---|
| Long-term capital gain | Rs. 12,00,000 |
| Net consideration | Rs. 30,00,000 |
| Investment in notified securities | Rs. 15,00,000 |
| Illustrative exemption | Rs. 6,00,000 |
| Remaining taxable capital gain | Rs. 6,00,000 |
This is a historical illustration, not a claim that Section 54EA can be used for a present-day transfer.
Three-year restriction and loans against securities
Under Section 54EA(2), if specified securities were transferred or converted into money within three years after acquisition, the previously exempt gain was deemed taxable as long-term capital gains in the year of the transfer or conversion. Taking a loan or advance against those securities was treated as conversion into money under the Explanation. Section 54EA(3) also prevented a rebate under the former Section 88 for the same investment cost used to claim the exemption.
Section 54EA versus other capital gains relief
Section 54EA was based on reinvestment of net consideration in notified securities. Section 54EC, a distinct provision, deals with investment of eligible long-term capital gains in specified bonds and has its own asset restrictions, monetary limits and holding conditions. The two sections should not be treated as interchangeable. The applicable law depends on the date of transfer and the relevant tax year.
Historical Section 54EA text and amendment notes
The original webpage's statutory extracts, definitions, restrictions and legislative notes are preserved below for reference. Superscript-style editorial footnote numbers in the old source are historical annotations, not part of the operative legal language.
Read the original historical provisions and amendment notes
1 ,2(1) Where the capital gain arises from the transfer of a long-term capital asset 3 before the 1st day of April, 2000 (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 the net consideration in any of the 4 bonds, debentures, shares of a public company or units of any mutual fund referred to in clause (23D) of section 10,specified by the Board in this behalf by notification in the Official Gazette (such assets hereafter in this section referred to as the 2 specified securities), 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 2 specified securities is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the 2 specified securities is less than the net consideration in respect 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 2 specified securities bears to the net consideration shall not be charged under section 45.
(2) Where the 2 specified securities are transferred or converted (otherwise than by transfer) into money at any time within a period of three years from the date of their acquisition, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such 2 specified securities as provided in clause (a) or clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head Capital gains relating to long-term capital assets of the previous year in which the 2 specified securities are transferred or converted (otherwise than by transfer) into money.
Explanation. In a case where the original asset is transferred and the assessee invests the whole or any part of the net consideration in respect of the original asset in any 2 specified securities and such assessee takes any loan or advance on the security of such 2 specified securities, he shall be deemed to have converted (otherwise than by transfer) such 2 specified securities into money on the date on which such loan or advance is taken.
(3) Where the cost of the 2 specified securities has been taken into account for the purposes of clause (a) or clause (b) of sub-section (1), a rebate with reference to such cost shall not be allowed under section 88.
Explanation. For the purposes of this section, (a) cost, in relation to any 2 specified securities, means the amount invested in such 2 specified securities out of the net consideration received or accruing as a result of the transfer of the original asset;
(b) net consideration, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by the expenditure incurred wholly and exclusively in connection with such transfer. ----------------------
1. Ins. by Act 33 of 1996, s. 20 (w.e.f. 1-10-1996). 2. Subs. by Act 14 of 1997, s. 2, for specified bonds or debentures (w.e.f. 1-10-1996). 3. Ins. by Act 10 of 2000, s. 25 (w.e.f. 1-4-2001). 4. Subs. by Act 14 of 1997, s. 2, for bonds, debentures or units of any mutual fund referred to in clause (23D) of section 10 (w.e.f. 1-10-1996).
Official legislation and further reading
For authoritative text, historical versions and amendments, refer to the Income Tax Department - Income-tax Act, the India Code legislative database, and the Income Tax e-Filing portal. Historical CBDT notifications identifying eligible securities should be checked for the particular investment date.
Last reviewed: 25 October 2026. General information only; consult the legislation applicable to the relevant transaction and assessment period.