Guide to .. Tax Management ,Tax Planning and Tax Saving

41.  A Magic “Capital Gains Bonds” to Save Capital Gains

The Finance Act, 2000 introduced for the first time the instrument of “Capital Gains Bonds” aimed at eliminating all tax liability deriving long-term capital gains. The taxpayers are very well aware that in case of all categories of taxpayers deriving long-term capital gains, there is a tax liability equal to 20% in respect of the entire amount of long-term capital gains on most assets, other than equity shares and equity- oriented mutual funds. From FY 2000-2001, relevant to the Assessment Year 2001-2002, however, Section 54EC provides to all categories of taxpayers, whether the individuals, HUFs, partnership firms, corporate sector, or other categories or tax entities, the option to save tax in respect of long-term capital gains by making investment in prescribed bonds.

To do so, the most important point to be borne in mind is that the entire long-term capital gains should be invested in these capital gains bonds. Another important pertinent point is that the investment in these bonds should be made within six months after the date of transfer of the capital asset. Similarly, saving of capital gains consequent to investment in these new bonds is possible only in respect of long-term capital gains; in the case of short-term capital gains, the benefit of investment in terms of this section will not be available.

Section 54EC originally stipulated the bonds issued by National Bank for Agriculture Rural Development, the National Highway Authority of India, SIDBI, NHB and REC. As per the Finance Act, 2006, on and from 1-4-2006 only the bonds of NHAI & REC (with a cap of
` 50 lakh) would now be eligible for tax exemption in terms of Section 54EC. It may be noted here that the provisions contained in Section

54EA and 54EB are not applicable in respect of long-term capital gains arising on and after 1st April, 2000. Hence, those tax-payers who derive long-term capital gains on and from 1st April, 2000 should make such investments.
Another salient requirement for availing of the tax exemption is that these bonds should not be sold at any time within a period of 3 years from the date of their purchase. In case you transfer or convert them into money in less than 3 years from the date of their acquisition, then the money so realised, or the value of such bonds, shall be deemed to be the income chargeable under the head capital gains in the previous year in which these bonds are transferred or converted into money. Hence, those taxpayers who are investing in these Capital Gains Bonds should ensure that these bonds are neither sold, nor even gifted within 3 years of purchase otherwise the objective of saving capital gains in respect of these bonds will not be achieved. Another restriction which applies to the “Capital Gains Bonds” is that the taxpayer should not take any loan or advance on the security of these bonds. In case any loan or advance is taken as a result of keeping these bonds as a security, then the amount of loan or advance so taken should be deemed to have converted these bonds into money on the date on which loan or advance is taken and the same will therefore become liable to tax as a long-term capital gain.
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