What is a capital gain?
Section 45 provides that any profits or gains arising from the transfer of a capital asset affected in the previous year will be chargeable to income-tax under the head ‘Capital Gains’. Such capital gains will be deemed to be the income of the previous year in which the transfer took place. There are some assets which are not part of capital assets like stock in trade, jewelry, drawings, paintings, sculptures, archeological collections etc.
Section 54EC of the Income tax act enlist the exemption of capital gain when the profit on sale of a long –term capital assets either immovable property or stocks and shares is further invested by taxpayer within 6 months of the sale under ‘Long- term specified assets’, it is also known as Capital gain tax exemption coupon. The Finance Act 2018 legislated some significant changes to Section 54EC.
- It restricted the reach of the exemptions only to capital gains arising solely from the property. Before this change came into play, Section 54EC excused capital gains from being derived from the transaction of any long term capital asset. This money can be invested under 54EC bonds, which otherwise will be taxed at 20% with indexation benefit.
Bonds qualified u/s 54EC
There should be a transfer of a long- term capital asset being land or building or both, such asset can also be a depreciable asset (in this case, building) held for more than 24 months.
Capital gains arising from such transfer should be invested in a long-term specified asset within 6 months from the date of transfer.
Long-term specified asset means specified bonds, redeemable after 5 years, issued on or after 1.4.2018 by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation Limited (RECL) or any other bond notified by the Central Government in this behalf [Bonds of Power Finance Corporation (PFC) and Indian Railways Finance Corporation (IRFC)].
- The maximum investment which can be made in notified bonds or bonds of NHAI and RECL, out of capital gains arising from transfer of one or more assets, during the previous year in which the original asset is transferred and in the subsequent financial year cannot exceed ` 50 lakhs.
- The assessee should not transfer or convert or avail loan or advance on the security of such bonds for a period of 5 years from the date of acquisition of such bonds.
- The most significant advantage for investors investing in these bonds is the sovereign backing provided by the Indian government. Moreover, they are AAA rated, which means that they come with minimal risk.
- The REC and NHAI bonds offer a stable interest rate of around 5.00% per annum, payable annually. Considering the safety-net attached to these bonds, the rate of interest lures many investors.
In the past few years, the government has shown its intention to narrow deductions, phase out exemptions and adjust tax rates. Hence, for investors generating profits against the transaction of their land or property, this is a good time to consider investing in these bonds.