All you wanted to know about Capital Gain Tax Bonds

capital gain tax

 

 

 

 

By Accommodation Times News Service

By FCA,  Rajkumar Adukia

Introduction

A person makes a gain when he buys any type of property for a lower price and then sells it at a higher price. The gain on such sale of property or capital asset is called capital gain.

Hence profits or gains arising from the transfer of a capital asset made in a previous year is taxable as capital gains under the head “Capital Gains” under the Income Tax Act, 1961. The important ingredients for capital gains are, therefore, existence of a capital asset, transfer of such capital asset and profits or gains that arise from such transfer.

Capital asset means property of any kind except stock-in-trade, etc. held for the purpose of business or profession; personal effects like wearing apparel etc.; agricultural land and certain bonds notified by the Central Government.

The incidence of tax on Capital Gains depends upon the length for which the capital asset transferred was held before the transfer. Ordinarily a capital asset held for 36 months or less is called a ‘short-term capital asset’ and the capital asset held for more than 36 months is called ‘long-term capital asset’.

If an investor sells a property (for example – house) after three years (36 months), then the profit earned will attract long term capital gains tax at a rate of 20% (after indexation). The assessee can choose to get exemption from this long term capital gain tax in 2 ways: i.e. either by investing the amount in buying or constructing a new house property within three years of selling the house and/or investing in Capital Gain Bonds.

Investment in Capital Gain Bonds

The investor can park the profit earned by selling the property, in Capital Gain Bonds that are issued by specified institutions. For the purpose of claiming tax benefits, investments should be made within a period of six months from the date when the capital asset was sold. Similarly, investors are required to stay invested in the bonds for a period of 36 months from the date of investment. Redemption before completion of the 36 month period will negate the tax benefits.

A bond is adebt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals (example – half yearly, annual, or sometimes monthly).

Section 54EC of Income Tax Act, 1961

Section 54ECofIncome-Tax Act, 1961deals withCapital gain not to be charged on investment in certain bonds.

Section 54EC – Capital gain not to be charged on investment in certain bonds –

(1) Where the capital gain arises from the transfer of a long-term capital asset (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 capital gains in the long-term specified asset, 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 long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45;

(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer 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 long-term specified asset bears to the whole of the capital gain, shall not be charged under section 45 :

[Provided that the investment made on or after the 1st day of April, 2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees.]

(2) Where the long-term specified asset is transferred or converted (otherwise than by transfer) into money at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such long-term specified asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head “Capital gains” relating to long-term capital asset of the previous year in which the long-term specified asset is 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 capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have converted (otherwise than by transfer) such specified asset into money on the date on which such loan or advance is taken.

(3) Where the cost of the long-term specified asset has been taken into account for the purposes of clause (a) or clause (b) of sub-section (1),—

(a) a deduction from the amount of income-tax with reference to such cost shall not be allowed under section 88 for any assessment year ending before the 1st day of April, 2006;

(b) a deduction from the income with reference to such cost shall not be allowed under section 80C for any assessment year beginning on or after the 1st day of April, 2006.

Explanation.—For the purposes of this section,—

(a) “cost”, in relation to any long-term specified asset, means the amount invested in such specified asset out of capital gains received or accruing as a result of the transfer of the original asset;

(b) “long-term specified asset” for making any investment under this section during the period commencing from the 1st day of April, 2006 and ending with the 31st day of March, 2007, means any bond, redeemable after three years and issued on or after the 1st day of April, 2006, but on or before the 31st day of March, 2007,—

(i) by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988); or

(ii) by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956),

and notified by the Central Government in the Official Gazette for the purposes of this section with such conditions (including the condition for providing a limit on the amount of investment by an assessee in such bond) as it thinks fit:

[Provided that where any bond has been notified before the 1st day of April, 2007, subject to the conditions specified in the notification, by the Central Government in the Official Gazette under the provisions of clause (b) as they stood immediately before their amendment by the Finance Act, 2007, such bond shall be deemed to be a bond notified under this clause;]

(ba) “long-term specified asset” for making any investment under this section on or after the 1st day of April, 2007 means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956).”

When does the benefit of Sec.54EC arise to the assessee?

  • The asset transferred should be a long term capital asset.
  • The assessee has invested the capital gain in the long term specified asset within a period of six months from the date of transfer of the asset.
  • Long term specified asset means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by the National Highways Authority of India or by the Rural Electrification Corporation Limited.
  • The cost of long term specified assets that are considered for the purpose of exemption under Sec.54EC will not be eligible for deduction with regard to such cost under Sec.80C of the Income Tax Act, 1961.

Maximum amount to be invested

The maximum amount that a person can invest in these bonds (NHAI and REC combined) in any financial year is Rs.50 lakh. If a person has long-termcapital gainswhich have accrued to him after 1st October of any year, and the amount ofcapital gainsexceed Rs.50 lakh, he can split his investment by investing Rs.50 lakh up to 31st March of the following year and the balance on 1st April of that year. The balance amount in this case, however, should not exceed Rs.50 lakh. By doing this, he can have thebenefitof investment of up to Rs.1 crore.

The deemed date of allotment is the last date of the month in which the application is made and the amount is realised by the issuer.

Holding the bonds

These bonds can be held in dematerialized form or in physical form. The bonds can be held under a single name or joint names. The facility for nomination is also available on these bonds. These bonds are non-transferable, non-negotiable and cannot be offered as security for any loan or advance. However, transmission of the bonds to legal heirs in case of death of the bondholder is allowed.

Calculation

For example – A person purchases a property for Rs.50 lakhs in 2006 and sells the same for Rs.75 lakhs in 2013. Then he has to pay capital gains on Rs.25 lakhs after working out the actual sale price after indexation. Suppose after indexation his profit is Rs 10 lakhs, then the Rs.10 lakhs profit has to be invested in Section 54EC bonds. The profit so earned can also be partially invested but in that case the remaining amount will attract capital gains tax.

Tax benefits

Capital gain bonds are tax free and will not attract TDS (tax deducted at source) provisions of Income Tax Act, 1961.

Eligible bonds under Section 54 EC

The two corporations which have been notified by the Government of India as being eligible for issue of these bonds are –

  1. National Highway Authority of India (NHAI)
  2. Rural Electrification Corporation (REC).

REC Capital Gain Tax Exemption Bonds Series-IX (2013-14)

  • Subscription period – Upto 31st March 2014
  • Face value – Rs.10,000 per bond
  • Tenure – 3 years
  • Coupon rate – 6.00% payable annually
  • Minimum investment – Rs 10,000/- (1 Bond)
  • Maximum investment – Rs 50,00,000/- (500 Bonds) each in a financial year (subject to section 54EC of IT Act 1961)
  • Interest payment and date – Annual on 30th June of each year
  • Redemption – At par, at the end of 3 years from the deemed date of allotment.

NHAI Capital Gain Tax Exemption Bonds Series-XIV

  • Subscription period – Upto 31st March 2014
  • Face value – Rs.10,000 per bond
  • Tenure – 3 years
  • Coupon rate – 6.00% payable annually
  • Minimum investment – Rs 10,000/- (1 Bond)
  • Maximum investment – Rs 50,00,000/- (500 Bonds) each in a financial year (subject to section 54EC of IT Act 1961)
  • Interest payment – Annually on 1st April & Final Interest on Maturity
  • Redemption – At the time of maturity i.e. 3 years.

Relevant Case Laws

  • For purpose of section 54EC, period of six months has to be reckoned from end of month in which transfer took place – [2012] 17 LNIN 159 (Mumbai – Trib.)
  • April 2011: Agra – ITAT: Land sold after dismantling building will be entitled for exemption under section 54F/54EC – Where the assessee sold the land where the building was in existence after dismantling the building, it will not be entitled for the exemption under section 54 on the capital gain arising on the sale of that land; the assessee can get the exemption on the capital gain arising thereon either under section 54F provided he complies with the conditions stated therein or under section 54EC.
  • In the case of ITO vs. Saraswati ramanathan (2008) 114 TTJ (Del) 803, the issue was whether investment made in joint names u/s 54EC bonds is eligible for exemption. The Hon’ble ITAT decided in favour of the assessee. The only condition u/s 54EC is investment of the capital gains in the specified asset and the sale proceeds should be traceable to such investment. It does not place any bar on the manner in which the investment is to be made.
  • In the case of HUL vs. DCIT (2011) 237 CTR (Bom) 287 the date of investment in bonds shall be date of payment and not the date of allotment. The date of allotment falls beyond the period of six months is of no effect when the amount has already been invested within the statutory period of six months from the date of transfer.
  • Where the assessee could not invest the money due to non availability of bonds qualifying for deduction under section 54EC, it was held there was a reasonable cause for not purchasing the bonds within the time specified in section 54EC. Since the assessee purchased the bonds as soon as same were available it was eligible to claim deduction under section 54EC. [Cello Plast v DCIT (2010) TIOL 60 ITAT(Mum.)]

Conclusion

The object of insertion of section 54EC was to give an incentive to the development of infrastructure. The only condition was that the funds used for the investment should be traceable to the sale proceeds of the capital asset. The capital gain bonds are also an incentive for assessees to save tax and invest in bonds that give good returns.





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