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Capital Gain Exemption on Investment in Certain Bonds – Sec 54EC

U.C Date : 25 Feb 2015

 

Eligible Assessee – Any person

Eligible Capital Gain – Any long term capital gain

Condition for exemption – The assessee has at any time within a period of 6 months after the date of such transfer invested the whole or any part of capital gains in the bonds redeemable after 3 years issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation Limited (REC).
Investment made by the assesse in such bonds during any one financial year should not exceed rs. 50 lakhs.
Total Investment made by the assessee in such bonds during the year of transfer of original asset and subsequent financial year should not exceed rs. 50 lakh. (Inserted by Finance Act no. 2, 2014. Effective from financial year 2014-15)

Amount of exemption – The amount of exemption will be lower of following

a) amount of capital gain
b) cost of investment in such bonds

Lock in period – 3 years

If such bonds is transferred or redeemed within 3 years of its purchase, the amount of capital gains exempt earlier is taxable under the head “Capital Gains” as long term capital gain in the year of transfer or redemption of such bonds.
If any loan or advance on the security of such bonds, then the bonds are deemed to be redeemed on the date on which such loan or advance is taken.

Case Laws

Where assessee receives sale consideration in instalments and he invested amount in specified bonds within a  period of 6 months from the date of receipts, he was entitled to deduction. Mahesh Nemichandra Ganeshwade vs ITO (Pune 2012)

If assesse wants to invest in bonds of REC which are not available throughout the period of 6 month, the time limit of 6 month can be extended even if bonds of NHAI are available CIT vs Cello Plast (Mumbai 2012)

If investment in bonds is closed for subscription, investment made immediately after reopening of subscription is qualified for exemption even if 6 months has passed. Shree Ram engineering Vs CIT (2012)

Depreciable assets are always considered as short term capital asset for calculation of tax. But if depreciable assets are hold for more than 36 months then they are eligible for deduction under section 54EC CIT vs Aditya Medisales ltd. (2013 Guj.)

Bare Act for Sec 54EC

Bare Act for Sec 54EC

(1) Where the capital gain arises from the transfer of a long-term capital asset (the capital asset so transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—

(a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45

(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under section 45 :

[Provided that the investment made on or after the 1st day of April, 2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees.]

The following second proviso shall be inserted after the existing proviso to sub-section (1) of section 54EC by the Finance (No. 2) Act, 2014, w.e.f. 1-4-2015 :

Provided further that 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.

(2) Where the long-term specified asset is transferred or converted (otherwise than by transfer) into money at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such long-term specified asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head “Capital gains” relating to long-term capital asset of the previous year in which the long-term specified asset is transferred or converted (otherwise than by transfer) into money.

Explanation.—In a case where the original asset is transferred and the assessee invests the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have converted (otherwise than by transfer) such specified asset into money on the date on which such loan or advance is taken.

[(3) Where the cost of the long-term specified asset has been taken into account for the purposes of clause (a) or clause (b) of sub-section (1),—

(a) a deduction from the amount of income-tax with reference to such cost shall not be allowed under section 88 for any assessment year ending before the 1st day of April, 2006;

(b) a deduction from the income with reference to such cost shall not be allowed under section 80C for any assessment year beginning on or after the 1st day of April, 2006.]

Explanation.—For the purposes of this section,—

(a) “cost”, in relation to any long-term specified asset, means the amount invested in such specified asset out of capital gains received or accruing as a result of the transfer of the original asset;

[(b) “long-term specified asset” for making any investment under this section during the period commencing from the 1st day of April, 2006 and ending with the 31st day of March, 2007, means any bond, redeemable after three years and issued on or after the 1st day of April, 2006, but on or before the 31st day of March, 2007,—

(i) by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988); or

(ii) by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956),

and notified by the Central Government in the Official Gazette for the purposes of this section with such conditions (including the condition for providing a limit on the amount of investment by an assessee in such bond) as it thinks fit:]

[Provided that where any bond has been notified before the 1st day of April, 2007, subject to the conditions specified in the notification, by the Central Government in the Official Gazette under the provisions of clause (b) as they stood immediately before their amendment by the Finance Act, 2007, such bond shall be deemed to be a bond notified under this clause;]

[(ba) “long-term specified asset” for making any investment under this section on or after the 1st day of April, 2007 means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 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).]

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