Capital Gains, Tax Bonds and Section 54EC

Capital Gains, Tax Bonds and Section 54EC

Student Research Project (Posted on 10/10/2006)
What are capital gains?
Any gain arising from the transfer of a capital asset during a previous year is rechargeable to tax under the head “Capital Gains” in the immediately following assessment year, if it is not eligible for exemption under sections 54, 54B, 54D, 54EC, 54ED, 54F and 54G. In other words capital gains tax liability arises only when the following conditions are satisfied:
Condition 1
There should be a capital asset
Condition 2
The capital asset is transferred by the assessee.
Condition 3
Such transfer takes place during the previous year
Condition 4
Any profit again arises as a result of transfer
Condition 5
Such profit or gain is not exempted from tax under
Sections 54A, 54B, 54D, 54EC, 54ED, 54F and 54G.
In the foresaid conditions are satisfied, then capital gain is taxable in the assessment year relevant to the previous year in which the capital asset is transferred. However the following points should be considered-
In some cases capital gain taxable in a year other than the year in which the capital asset is transferred.
In some cases capital gain arises even if there is no transfer of capital asset.
What is a transfer for the purposes of capital gains?
Section 2(47) of the Income Tax Act, defines transfer in relation to capital asset, and it includes
The sale, exchange or relinquishment of the asset; or
The extinguishment of any rights therein ; or
In case where the asset is converted by the owner thereof into, or treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;
Any property transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of any immovable referred to in section 53A of the Transfer of the Property Act, 1882(4 of 1882); or
Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of, any immovable property.
Explanation – For the purposes of sub-clauses (v) and (vi), “Immovable property” shall have the same meaning as in clause (d) of section 269UA.
“Capital asset” is defined to include property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. The following assets are however excluded from the definition of “capital assets”.

Assets not treated as “Capital assets”
Exception 1
Any stock in trade, consumable stores or raw material held for the purposes of business or profession.
Exception 2
Personal effects of the assessee, that is to say, movable property including wearing apparel and furniture held for his personal use or for the use of any member of his family dependant upon him(jewellery is treated a capital asset even though it is mean for the personal use of the assessee).
Exception 3
Agriculture land in India provided it is not situated in –
In any area within the territorial jurisdiction of the municipality or a
In any notified area
Exception 4
6 ½ percent Gold Bonds, 1977 or 7 percent Gold Bonds, 1980 or National Defense Gold Bonds, 1980 issued by central Government.
Exception 5
Special Bearer Bonds, 1991
Exception 6
Gold Deposit Bonds issued under Gold Deposit Scheme, 1999

“Short term capital asset’ means a capital asset held if a capital asset is held by an assessee for not more than 36 months, immediately prior to its date of transfer. In other words if a capital asset is held by an assessee for more than 36 months, then it is known as “long-term capital asset”.
Computation of short term and long term capital gain
— Short term capital gain
Find full value of consideration
Deduct expenses on transfer, cost of acquisition, cost of improvement
Deduct exemption u/s 54B, D and G.
The balancing amount is Short term capital gain
Deduct the expenses on transfer, indexed cost of acquisition, indexed cost of improvement
Deduct exemption u/s 54B, D, EC, ED, F, G.
The balancing amount is long term capital gain.
This section offers an exemption in the case of capital gains arising from the transfer of long-term assets. The exemption is available to all assesses, unlike the section 54 exemption (for gains arising from the transfer of a residential house where they are reinvested in another residential house) that’s available only to individuals and Hindu Undivided Families.
To avail of section 54EC exemption, you must invest your long-term capital gains (not the sale proceeds), either wholly or in part in a specified instrument, within six months of the transfer of the asset. The exemption is available to the extent of the gains invested or the cost of acquisition of the asset, whichever is less.
The salient features are:
Conditions: The following conditions should be satisfied:
Long term capital asset: A long term capital asset is transferred by an assessee (who may be an individual, firm, company or any other person) during the previous year.
Investment in “specified asset” – within six months from the date of transfer of the asset, the assessee should invest the whole (or any part of ) capital gain in the long term specified assets. “Long term specified assets” means any bond redeemable after 3 years issued—
By the National bank for agriculture and rural development or by the national highways authority of India;
By the rural electrification corporation Ltd; or
By the National Housing bank or by the small industries development bank of India.
Amount of exemption
The amount of exemption under section 54EC is as follows—
The amount of Capital gains generated on transfer of capital asset; or
The amount invested in specified assets as stated above, which ever is lower.
The cost of specified assets which is considered for the purpose of section 54EC shall not be eligible for tax rebate under section 88.
Mr. Verma sells the following long term assets on Jan 11, 2005-
Residential Gold Silver Diamonds
Property (Rs) (Rs) (Rs) (Rs)
Sale consideration 390000 810000 296000 640200
Indexed cost 70000 115000 178000 430000
Expenses on transfer 10000 81000 6000 32000
The due date of filing return of income for the assessment year 2005-06 is July 31, 2005. For claiming exemption under section 54 and 54EC, Mr. Verma purchases the following assets-
Date of acquisition
Amount (Rs)
Land (for constructing a residential house)
Mar 31, 2005
Bank deposit (for constructing house)
Aug 5, 2005
Bonds for National Bank for agriculture and rural development (redeemable on July 5,2009)
July 5, 2005
Bonds of National Highway Authority Of India (redeemable on Aug 10,2014)
July 10,2005
The amount of capital gain chargeable to tax for the assessment year 2005-06 :

House property (Rs)
Gold (Rs)
Silver (Rs)
Diamond (Rs)
Sale Consideration
Less: Expenses on transfer
Net sale consideration (a)
Less: Indexed cost of acquisition
Long term capital gain (b)
Exemption under Sec 54( c)

Exemption under Sec 54EC(d)
Capital gain chargeable to tax (b)-(c)-(d)

Capital Gain Bonds
Investments in bonds issued by the National Bank for agriculture and rural development (NABARD), National Highway Authority of India (NHAI) and rural electrification corporation (REC) are at present eligible for capital gains tax savings. Gains made out of a transfer need to be invested in the above bonds within six months of sale capital assets in order for the proceeds of such sale to be exempt from capital gains tax. These bonds are available on an tap basis, i.e., continuously open for sale.
MINIMUM INVESTMENT: Minimum investment for NABARD Bonds is Rs 10000 or in multiples thereof and Rs 100000 for NHAI bonds. For REC, each bond has a face upper limit for investments in the above instruments.
INTEREST: In REC bonds, interest is paid @ 5%. An NHAI bond carries a coupon rate of 6.5%. interest is payable every year @ 5% (currently) in the case of NABARD Bonds.
MATURITY: The maturity of bonds is at the expiry of 7 years in case of NHAI, with a lock in period of 3 years as specified under section 54EC of the Income Tax Act, 1961. Similarly, NABARD/REC bonds are for 5 years and have lock in period of 3 years from the date of allotment of the bonds.
PREMATURE WITHDRAWL: NABARD/REC cannot be traded in the secondary market. While both these bonds have a lock in period of 3 years, NHAI bonds have a call and put option after 3 years.
LOAN FACILITY: NABARD/NHAI bonds cannot be offered as security for any loan or advance. This because instruments under section 54EC of the Income Tax Act, 1961, cannot be offered as security for a loan.
CREDIT QUALITY: The bonds are rated AAA by credit rating agencies, denoting maximum safety on your investment.
DETERMINATION OF MARKET VALUE OF NABARD/NHAI BONDS: The market value of the instrument is determined by the interest rate fixed for the instrument and the financial status of the issuing entity at the point of time.
The main feature of the NABARD/NHAI bonds is that you can claim Capital Gains Tax benefits benefit under section 54EC of the Income Tax Act, 1961. If you have realised any long term capital gains, you can avoid paying tax on it by investing the gains in the NABARD and NHAI bonds. Such gains have to be invested within 6 months of realising the same and the investment has to be locked for a minimum period of 3 years. However, the interest will accrue on this investment is taxable.

Note from Principal : Only REC and NHAI are now allowed to issue such bonds in the Current financial year of 2007-08.

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29 thoughts on “Capital Gains, Tax Bonds and Section 54EC

  1. is transfer of right of ansesital ( by succesion) residential property for consideration to brother is taxable . If yes can it be invested in purchasing plot to costruct residential house to avail exemption.

  2. under section 54ec investment in specified assets has to be done with in the six months from the date of transfer or from the end of previous year

    in a problem it was given that a house property was sold on 1-10-2010 for 80 lakhs and it was purchased for 10 lakhs in jan 2000 and cost of improvement was done in oct 2004 for 2 lakhs for construction of a first floor and purchased a house property for 25 lakhs jan 2010 and investment of rs20 lakhs in nhai bonds in june 2011

    Q: whether the investment of 20 lakhs will be claimed as exemption u/s 54ec

    sir tell me the answer with reason (basically the section c is telling that the investment in specified assets within six months from the date of transfer of asset)
    in bharath publication the investment in nhai is given as exemption u/s 54ec
    whether it will be taken as exempton or not please tell me the answer because iam in confusion with that…….

  3. In your article you have mentioned that ‘To avail of section 54EC exemption, you must invest your long-term capital gains’ but If Understand currect then for geting 54 EC exemption your asset which is getting transferred should be a long term capital asset. [ Because in case of transfer of Long term depreciable fixed asset the capital gain would be Short term capital gain and in this case also the assessee can still get the exemption under section 54 EC]

  4. Just to add further on section 54 EC :

    The Assessee and his/her minor children are each entitled to separate investment and deduction limits of Rs.50 lakhs u/s 54EC; and clubbing of LTCG u/s 64(1A) to be made after allowing deduction to each child upto Rs. 50 lakhs.
    As per the definition of ‘person’ u/s 2(31), a minor is an assessable entity even though his income is clubbed u/s 64(1A) of the Act in the hands of his parents. A minor is a person distinct from his parents and is also an individual. There is no bar in separately allotting bonds upto Rs. 50,00,000 to each such person.
    There is no mentioned limit on the deduction allowable to an assessee under section 54EC.(The limit of Rs.50 lakhs is ceiling on investment that may be made by an assessee and not a ceiling on deduction that may be allowed to an assessee). Thus, AO was not right in disallowing deductions in respect of bonds invested by minor children of the assessee by applying the Rs.50 lakhs limit.
    Section 64(1A) says ‘In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child.’ The word ‘such’ means the total income of the minor, because ‘such’ is preceded by the word total income.
    Thus, all the deductions are to be allowed while computation of income of the minor/spouse and only the net taxable income is to be clubbed under section 64.

  5. I have made an agreement of sale of a flat by paying full consideration as full & final settlement on 30.01.2010 and registered the same on 31.01.2012 and the same will be sold on 2nd day of February of 2013 . Is it the total consideration be treated as Long term capital gain?


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