With effect from the A.Y. 2001-2002, a new Section 54EC was inserted in the 1.T. Act to provide for exemption in respect of long-term capital gains in the hands of any assessee, whether an NRT or a resident assessee. This exemption is in respect of long-term capital gains of any asset which are invested in select bonds, redeemable after a period of three years issued on or after 1 April 2000 by the National Highways Authority of India (NHAI) and on bonds of Rural Electrification Corporation Ltd., etc. The exemption from income tax on long-term capital gains of the NRI would be to the extent of investment not exceeding 50 lakh in these bonds. These bonds have a lock-in-period of three years. Interest rate is around five and a half per cent per annum. Any transfer or conversion of bonds into money during the lock-in period would make the amount so converted as deemed capital gains to be taxable in the year of transfer or conversion. Similarly, such deemed capital gains would also arise, if any loan or advance is taken on the security of these bonds.
As per the Finance Act, 2006 the Bonds issued only by NHAI and REC would qualify for exemption of long-term capital gains under Section 54EC, as are issued on and after 1.4.2006.