Section 54ED of Income Tax Act 1961: Capital Gain on Certain Listed Securities or Units

Section 54ED was a capital gains exemption provision for specified transfers of long-term listed securities or units. Its practical scope is historical because subsection (1) applies only where the original asset was transferred before 1 April 2006.

Current legal status: The Income-tax Act, 2025 came into force on 1 April 2026 and repealed the Income-tax Act, 1961, subject to the repeal-and-savings provisions in Section 536. Section 54ED of the 1961 Act therefore remains relevant principally for historical matters, saved rights or liabilities, and proceedings to which the repealed Act continues to apply. It is not an exemption for a fresh transfer made in 2026.
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Meaning and Scope of Section 54ED

Section 54ED of the Income-tax Act, 1961 dealt with capital gain arising from the transfer of a long-term capital asset consisting of listed securities or a unit. For the section to apply, the transfer had to take place before 1 April 2006 and the assessee had to invest the whole or part of the capital gain, within six months after the transfer, in equity shares forming part of an eligible issue of capital.

In the section, the listed securities or unit transferred are referred to as the original asset, while the qualifying equity shares acquired from the eligible issue are referred to as the specified equity shares.

Conditions for the Historical Exemption

  1. The capital gain must have arisen from transfer of a long-term capital asset.
  2. The long-term capital asset must have been listed securities or a unit as understood for Section 54ED.
  3. The transfer of the original asset must have occurred before 1 April 2006.
  4. Within six months after the date of transfer, the assessee must have invested the whole or part of the capital gain in qualifying equity shares.
  5. The equity shares must have formed part of an eligible issue of capital.

How the Exempt Capital Gain Was Determined

Where the cost of specified equity shares was at least equal to the capital gain

If the cost of the specified equity shares was not less than the capital gain from the original asset, the whole qualifying capital gain was not charged under Section 45.

Where the investment was less than the capital gain

If the cost of the specified equity shares was less than the capital gain, only the proportionate part of the capital gain was excluded from charge under Section 45.

Proportionate exempt amount:
Capital gain x Cost of specified equity shares / Total capital gain

Section 45 was the charging provision for capital gains under the Income-tax Act, 1961. Section 54ED operated as a specific historical relief from that charge when its conditions were satisfied.

Definitions Used in Section 54ED

Eligible issue of capital

For Section 54ED, an eligible issue of capital meant an issue of equity shares satisfying both conditions: the issue was made by a public company formed and registered in India, and the shares forming part of the issue were offered for subscription to the public.

Listed securities

The expression listed securities was linked by Section 54ED to the meaning given in clause (a) of the Explanation to Section 112(1) of the 1961 Act.

Unit

The expression unit was linked to the meaning assigned in clause (b) of the Explanation to Section 115AB of the 1961 Act.

Sale or Transfer of Specified Equity Shares Within One Year

Under Section 54ED(2), if the specified equity shares were sold or otherwise transferred within one year from their acquisition, the capital gain on the original asset that had escaped charge under Section 45 by reason of the Section 54ED investment was brought back to tax. The amount was deemed to be long-term capital gain income of the previous year in which those specified equity shares were sold or otherwise transferred.

Restriction on Double Benefit

Where the cost of specified equity shares had already been taken into account for the Section 54ED exemption, Section 54ED(3)(b) prevented a deduction from income under Section 80C with reference to that same cost for an assessment year beginning on or after 1 April 2006.

The former clause (a) of Section 54ED(3), concerning deduction under Section 88 for assessment years ending before 1 April 2006, was omitted with effect from 1 April 2023. It should not be presented as part of the current displayed text of Section 54ED.

Why Section 54ED Still Appears in Historical Tax Research

Although the exemption was closed to transfers on or after 1 April 2006, the provision can still matter when examining old assessments, appeals, litigation, accrued rights or liabilities, or other proceedings preserved by the repeal-and-savings framework. The relevant law must therefore be matched to the tax year and the nature of the proceeding.

Official References

Income Tax Department - Section 54ED official text Income Tax Department - Income-tax Act, 2025 and transition resources Income-tax Act, 2025 - official PDF, including Section 536 repeal and savings

Note: This article is intended as a legal and tax information reference. Historical provisions should be applied with the law, amendments and savings provisions relevant to the particular tax year and proceeding.