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.
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