Capital Gain Bonds U/S 54 EC

gavelBy CA, Dr. Rajendra Jain

Under income tax law various exemptions and deductions are provided . if citizens use wisely these provisions they can reduce their tax in legal manner . and at various judicious forum it is admitted that every citizen has right to plan his affairs to minimize his tax liability ,that is called “tax planning “

In view to promote savings habit amongs citizens and same time to make available cheap funds to the much needed infrastructure projects of the country the government has introduced the provision of sec 54EC, where by two companies are so far allowed to issue bonds under this section they are

REC ( Rural Electrification corporation )

NHAI ( National Highway Authority of india )

These companies issues the capital gain bonds , The companies specify what are the rules and regulations for investment/redemption/ interest rate/ interest durations etc.

The scheme of section says when ever  any assessee gets income by way of   long term capital gain he can invest  that capital gain maximum upto 50lacs in a financial year within six months from the date of transfer of the original capital assets , the gain so invested will be exempt from the capital gain tax .

All government scheme come with certain terms and conditions and to be eligible for the deduction one has to fulfill the specified conditions as stated in the section, which are narrated below  .

All assesses are eligible for deduction under this section.

The capital gain can be from transfer of any long-term capital asset.

The investment to be made within 6 months from the date of transfer of capital asset.

Investment made for exemption cannot exceed more than 50 lakhs during the financial year.

Here there is a good catch. Suppose if the asset is sold as on 1st August 2012 resulted in to long term capital gain of Rs. 1 crore then up to 31stJanuary 2013 he can make maximum investment of Rs. 50 Lakhs and on the balance Rs. 50 lakhs he has to pay the capital gain tax.

Where as if the asset is sold as on 1st December 2012 then he can invest upto 31st March 2013 Rs. 50lakhs and upto 31st may remaining Rs. 50 lakhs and can claim entire Rs. 1 crore as deduction.

Investments made prior to transfer of asset are not eligible for deduction.

There is no need for nexus of consideration and investment in bonds. Assesse can use the gain as he wish till 6 months and before expiry of time he has to invest in the bonds.

It is not necessary to invest entire gain, investment can be partially but the exemption will be restricted up to the amount of bond purchased with the celling of Rs,50 lacs.

The investment has to be minimum for a period of 3 years. And during this period the assesse should not en cash these bonds or should NOT take any loan  against these bonds else the amount of capital gains arising from the transfer of original asset which was not charged to tax will be deemed to be the income by the way of long term capital gains of the previous year in which these bonds are encashed or loan is taken against the bonds.

Interests from these bonds are taxable as income of the assesse.

Inspite of above restrictions it is worthwhile to invest in these bonds.  Given below a Comparative analysis of  investment in bonds visa versa investments in fixed deposits in banks on getting long term gain.

Comparision of investment in bond v/s bank FD’s

Investment of gain in bonds Investment of gain in  Bank FD
Total Capital Gain 100 100
If you don’t invest in bonds then you have to pay 20% LTCG Tax 100 80
Interest @ 6% on bonds payable annually. 6
Interest @ 9% payable by bank(for brevity we consider interest is paid annually) 7.20
Tax on interest @ 30% 1.80 2.16
Annual post tax return 4.20 5.04
Return in three years post tax 12.60 15.12
On maturity you will get 100 80

So this tabular representation shows that the return form bonds in 112.60 and from bank FD’s is 95.12.

So it is advisable to invest in bonds as compared to bank FD’s.

Some important judicial judgment worth knowing about the investment  in bonds u/s54 EC.

If the consideration is received in installments then the period of six months will be counted from the date of receipt of amount . This judgement was given by pune tribunal in the case of Mahesh Ganeshwade v/s ito 51 SOT 155 .

On several occasions it so happens that there is no bonds u/s.54EC are available in the market up to six months from the date of gain , in such case the time limit of six months should be extended till the bonds are available in the market decided by Bombay highcourt in the case of cit v/s cello plast 209 taxman 617

Even long term gain on sale of depreciable assets can be invested in the bonds of sec54EC for claiming the exemption and it is allowed as decided in the case of ……… REPORTED IN THE CASE OF ASSAM PETROLEUM INDUSTRIES REPORTED IN 131 TAXMAN 699

To sum up it is worth considering investment in tax saving bonds as a tax saving tool in case of long term capital gain.

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One thought on “Capital Gain Bonds U/S 54 EC

  1. please send contact no. calculation of interest given above is very simple & easy to understand thanks

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