Can you claim Section 54EC exemption on a depreciated property? Here’s what tax rules say

Taxation rules under section 54EC

• Exemption under Section 54EC is allowed for sale till 31 Mar 2026
• Depreciable assets sold before 1 Apr 2026 can claim 54EC benefit
• 54EC exemption for depreciable assets ends April 1, 2026

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Can a taxpayer who sold a business property after claiming depreciation for decades may still claim Section 54EC exemption? Today's Ask Wallet Wise query decodes whether 54EC exemption can be claimed on depreciable business property.

A person who sold his business property after 30 years on which he had claimed depreciation till now.  Can he invest and under section 54EC?

Expert's advice: Section 50C of the Income Tax Act provides that any profits realised on sale of depreciable asset shall be treated as short term capital gains irrespective of the period for which the asset sold was held.

This is a deeming provision where capital gains of a long term capital asset is to be treated as short term capital gains. The deeming provisions create a legal fiction, to treat a fact or status as existing even if it does not, to achieve specific legislative purpose. Jurisprudence mandates that the deeming provisions should be interpreted strictly and be applied only for the purpose they are created, and should not be extended beyond their intended scope to avoid absurdity. The purpose of deeming such capital gains is to apply the appropriate tax rates on such capital gains.

Section 54EC provides for exemption to any assessee from long term capital gains arising from transfer of long term capital asset being a land or building if the capital gains are invested in capital gains bonds of specified financial institutions within six months from date of sale of the long term capital assets.

Section 2 defines long term capital asset and short term capital assets based on their holding period and does not specifically provide that any capital asset on which depreciation has been claimed shall be treated as short term capital asset irrespective of the holding period.

Reading of all these section together and keeping in mind the jurisprudence of deeming provisions it can be concluded that even if the capital gains on depreciable asset are treated as short term capital gains the capital asset itself does not cease to be a long term capital asset and thus the tax payer can claim exemption under section 54EC in respect of capital gains arising from such long term capital asset and treated as short term capital gains. This view is supported by the Supreme Court in the case of CIT v. V.S. Dempo Company Ltd.

Please note that the Section 85 of the Income Tax Act, 2025 which comes into effect from 1st April 2026 uses the word "long-term capital gains" and not the “Long-term Capital Asset”. This change closes the loophole for depreciable assets. So, in my opinion a person can claim exemption under Section 54EC till transfer of depreciation assets done till 31st March 2026.

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