How to Save Income Tax on Capital Gains by Bond Investment : Section 54EC Income Tax

By | August 10, 2018
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(Last Updated On: August 10, 2018)

How to Save Income Tax on Capital Gains by Bond Investment

Video Explanation by CA Satbir Singh on how to Save Income Tax on Capital Gains by Bond Investment

Sale of Building by Mr Raj is as Follow

Date of Sales 01.04.2018 and Sale Consideration received is  Rs 1.00 Crore

Cost of Acquisition on 01.06.2008 (FY 2008-09) Rs 4,00,000

Computation of capital gain will be as follows :

ParticularsRs.
Full value of consideration (i.e., Sales consideration of asset)1,00,00,000
Less: Expenditure incurred wholly and exclusively in connection with
transfer of capital asset (brokerage)
Net sale consideration1,00,00,000
Less: Indexed cost of acquisition (*) 400000*280(FY 2018-19)/137 (FY 2008-09)

Cost of acquisition × Cost inflation index of the year of transfer of capital asset/ Cost inflation index of the year of acquisition

8,17,518
Less: Indexed cost of improvement, if anyNil
Long-Term Capital Gains91,82,482

Long-term capital gains are charged to tax @ 20%  in case of Land and Building (plus surcharge and cess as
applicable),

Tax on Long Term Capital Gain  @ 20% Rs 1836496  ( Plus Surcharge and Cess extra )

How Mr Raj Can save this Income Tax ?

 

If Mr Raj Invest in Bonds as per Section 54EC within 6 months from Date of Transfer of asset then :-

NHAI Bonds Purchased on 01.6.2018  Rs 35 Lakh ( Within 6 months from Date of Transfer of asset)

RECL Bonds Purchased on 01.07.2018 Rs 25 Lakh ( Within 6 months from Date of Transfer of asset)

ParticularsRs.
Full value of consideration (i.e., Sales consideration of asset)1,00,00,000
Less: Expenditure incurred wholly and exclusively in connection with
transfer of capital asset (brokerage)
Net sale consideration1,00,00,000
Less: Indexed cost of acquisition (*) 400000*280(FY 2018-19)/137 (FY 2008-09)8,17,518
Cost of acquisition × Cost inflation index of the year of transfer of capital asset/ Cost inflation index of the year of acquisition
Less: Indexed cost of improvement, if anyNil
Long-Term Capital Gains91,82,482
Less 54EC Eliigibility up to Rs  50 Lakh50,00,000/-
( Amount invested in Bonds is Rs ( Rs 35 + Rs 25 Lakh = Rs  60 Lakh)
Net Long-Term Capital Gains41,82,482/-

Tax on Long Term Capital Gain  @ 20% Rs 8,36,496.40/-  ( Plus Surcharge and Cess extra )

Q How Can you Save Income Tax by Investing in Bonds ?

You can invest in Bonds as per Section 54EC of Income tax Act 

Q Who can make the Investment in Bonds to Save Income tax on Long term Capital gains ?

This exemption is available to any assessee. ( Individual / HUF, Partnership Firm etc)

Q What is the condition for Investment in Bonds to Save Income tax on Long term Capital gains ?

  • The asset transferred should be Land or Building or Both
  • The Asset should be long Term Capital Asset

Note : Relief under section 54EC is not available to capital gains arising on transfer of any other long-term capital asset except ‘land or building or both’.

On a plain reading, it can be said that relief under the section is available in respect of capital gains arising on transfer of following long term capital assets:

(i)any type of land including agricultural land, industrial land, farm house land, etc.;
(ii)any type of building including residential building, commercial building, farm house, factory, etc.

Note : Transfer of rights under agreement to purchase is not a transfer of land [Smt. Devindraben I. Barot v. ITO [2016] 159 ITD 162 (Ahd. – Trib.)

Leasehold rights are not land or building  [Shavo Norgren (P.) Ltd. v. Dy. CIT [2013]58 SOT 23 (Mum. – Trib.);

The following capital assets may not  be regarded as land or building or both:

(a)leasehold rights
(b)rights of a buyer of land or building under an agreement to sell.
(c)tenancy rights
(d)Transferable Development Rights (TDR)
(e)development rights in land

Q  What is Long Term Capital Asset ?

With effect from A.Y. 2018-19 (Financial Year 2017-18) , period of holding to be considered as 24 months in
in case of immovable property being land or building or both to qualify as a long-term capital asset.

Thus, if such house property is sold after 2 years of purchase/ Holding, the capital gain shall be long term. and Investment can be made in bonds under Section 54EC of Income Tax Act

Q What are the Bonds in Which you can make Investment to Save Income tax on Long term Capital gains ?

Meaning of Long Term Specified Assets:

“long-term specified asset” for making any investment under this section,—
(i)on or after the 1st day of April, 2007 but before the 1st day of April, 2018, means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 but before the 1st day of April, 2018;
(ii)on or after the 1st day of April, 2018, means any bond, redeemable after five years and issued on or after the 1st day of April, 2018,
  • by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) or
  • by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956) or
  • any other bond notified in the Official Gazette by the Central Government in this behalf.

Q Within how much time , you needs to Invest in Bonds after transfer of Land or Building ?

  • The amount should be invested in the long-term specified assets within a period of 6 Months after the date of such transfer.

Q What is the Maximum amount That can be Invested in Bonds ?

Investment in bonds is limited to Rs. 50,00,000/-. The investment made by an assessee in the long-term specified asset, from capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.

Q What is the tenure(time) of Bonds as per section 54EC ?

Bonds  issued on or after the 1st day of April, 2018 will be redeemable after five year .

Q What will happen if Bonds Invested  as per section 54EC are transferred or  Converted into Money or if Loan is Taken ?

Consequences if the Bonds are transferred or Converted into Money within 5 Years:

The amount claimed as exempt u/s 54EC shall be deemed to be long-term capital gain of the previous year in which the bonds are transferred or converted into Money.

If the assessee takes any loan or advance on the security of such bonds, he shall be deemed to have converted such bonds into money on the date on which such loan or advance is taken.

Q Can I claim Section 80C Deduction also for Bonds Invested as per Section 54EC ?

The cost of bonds which is considered for the purpose of exemption u/s 54EC shall not be eligible for deduction u/s 80C.

Q : Whether Interest on Bonds invested as per Section 54EC is Taxable ?

Taxability of Interest on Bonds: Interest earned on these bonds is taxable as Income from other sources. 

Refer Income Tax Exemptions : Free Study Material

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