Exemption of Capital Gain on Transfer of any Long Term Capital Asset on the basis of Investment in certain Bonds [Section-54EC]

1. The Provisions of Section 54EC towards Exemption of Capital Gains on Transfer of any Long Term Capital Asset on the basis of Investment in certain Bonds are given below –

1. Who can claim exemption :

Any Taxpayer

2. Which specific asset is eligible for exemption :

Long-term capital asset (being land or building or both) (may be residential or commercial, may be situated in India or outside India).

3. Which asset the taxpayer should acquire to get the benefit of exemption :

Bonds of National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) or notified bonds. Maximum investment in one financial year is Rs. 50 lakh, Moreover, investment made by an assessee in the NHAI/REC bonds/notified bonds, out of capital gains arising from transfer of one or more original asset, during the financial year in which the original asset or assets are transferred and in the subsequent financial year should not exceed Rs. 50 lakh.

4. What is time-limit for acquiring the new asset :

Within 6 months from the date of transfer.

5. How much is Exempt (Quantum of Deduction):

Investment in the new asset or capital gain, whichever is lower.

In other words, capital gain shall be exempt to the extent it is invested in the long-term specified assets within a period of 6 months from the date of such transfer.

The new asset should not be transferred within 3 years, if investment is made before April 1,2018.

6. Is it possible to Revoke the Exemption in a Subsequent Year :

In the following cases, exemption will be taken back (and the amount of exemption given earlier will become long-term capital gain of the year in which the assessee commits the following default) –

  • – If the new asset (i.e., bonds of NHAI/REC/notified bonds) is transferred within 5 years from its acquisition.
  • – If the new asset is converted into money or any loan/advance is taken on the security of the new asset within 5 years† from the date of acquisition of the new asset.

7. Investment in Bonds limited to Rs. 50 Lakh :

The investment made in the long-term specified asset by an assessee out of capital gains arising from transfer of one or more original asset during any financial year in which the original asset or assets are transferred and in the subsequent financial year cannot exceed Rs. 50 lakh.

8. Consequences if the long-term specified asset is transferred or converted into money within 3 years:

Where the long term specified asset is transferred or converted (otherwise than by transfer) into money at any time within a period of 3 years from the date of its acquisition, the amount of capital gain exempt u/s 54EC earlier, shall be deemed to be long-term capital gain of the previous year, in which the long term specified asset is transferred or converted (otherwise than the transfer) into money.

  1. If the assessee takes any loan or advance on the security of such long-term specified asset, he shall be deemed to have converted (otherwise than by transfer) such long-term specified asset into money on the date on which such loan or advance is taken.

  2. The Board has decided that the period of six months for making investment in specified assets for the purpose of section 54EC should be taken from the date such stock in trade is sold or otherwise transferred and not from the date when it is converted in to stock in trade.

  3. “Long-term specified asset” means the bonds redeemable after 3 years issued on or after 1.4.2007 by the National Highways Authority of India (NHAI) and the Rural Electrification Corporation Ltd. (RECL) or any other bond notified by the Central Government in this behalf The Power Finance Corporation Limited has since been notified by the Central Government.

 

Example :

Mr. Dust acquired shares of G Ltd., on 15.12.2008 for Rs. 8,00,000 which were sold on 15.5.2017 for Rs. 19,50,000. Expenses of transfer were Rs. 20,000. He invests Rs. 3,00,000 in the bonds of Rural Electrification Corporation Ltd. on 16.10.2017.

  1. Compute the capital gain for the assessment year 2018-19.

  2. State the period for which the bonds should be held by the assessee. What will be the consequences if such bonds are sold within the specified period?

  3. What will be the consequences if R takes a loan against the security of such bonds ?

Solutions :

  1. Example of Section 54EC

  2. Mr. Dust should not transfer or convert (otherwise then transfer) into money such bonds within 3 years from the date of their acquisition. If these bonds are transferred or converted into money within 3 years, capital gain of Rs. 3,00,000 exempt under section 54EC earlier, will be long-term capital gain of the previous year in which such asset is transferred or converted into money.

  3. If any loan is taken against the security of such bonds, it will be treated as if it is converted into money as such capital gain exempt earlier on such bonds, shall be long-term capital gain of the previous year in which such loan is taken against the security of such bonds.

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