Introduction: Capital gains, a crucial aspect of taxation, arise from the transfer of a capital asset in the previous year. To comprehend the tax implications, it’s essential to understand the definition of a capital asset under the Income Tax Act, 1961. Additionally, the Act classifies capital assets into short-term and long-term based on the holding period. This article delves into the intricacies of Section 54EC, a provision offering exemptions on long-term capital gains through strategic investments in specified bonds.

Capital Gains means any profits or gains arising from the transfer of a capital asset effected in the previous year.

It is important to know that which assets are to be considered as capital asset. Under the Income Tax Act, 1961 Capital Asset is define u/s 2(14).

The term ‘capital asset’ means: (a) property of any kind held by an assesse, whether or not connected with his business or profession; (b) any securities held by a Foreign Institutional investor, which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992; and (c) any unit link insurance policy to which exemption u/s 10(10D) does not apply on account of the applicability of “asset” does not include inter alia:

(1) any stock-in trade (other than the securities);

(2) personal effects such as wearing apparel, furniture, motor car, refrigerator, air conditioner, etc; held for personal use by the assesse or by any member of his family dependent on him.

However, definition of term capital asset shall include jewelry, archaeological collections, drawings, paintings, sculptures or any work of art, even though these assets are personal effects and transfer of such personal effects will attract tax on capital gains [section 2(14)(ii)];

(3) 6.5 % Gold Bonds, 19771; 7% Gold Bonds, 1980; National Defense Gold Bonds, 1980; Special Bearer Bonds, 1991; Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government [240ITR(St.) 1]; deposit certificate issued under the Gold Monetization Scheme, 2025 notified by the Central Government; and

(4) Agricultural land in India, not being land situate:

(a) in any area within the jurisdiction of a municipality or a cantonment board which has a population of not less than 10,000; or

(b) in any area within the distance, measured aerially, (1) not being more than 2 kilometers from the local limits of any municipality or cantonment board referred to in item (a) above and which has a population of more than 10,000 but not exceeding 1,00,000; or (2) not being more than 6 kilometers, from the local limits of any municipality or cantonment board referred to in item (a) above and which has a population of more than 1,00,000 but not exceeding 10,00,000; or (3) not being more than 8 kilometers, from the local limits of any municipality or cantonment board referred to in item (a) above and which has a population of more than 10,00,000.

As per Section 2(42A), Capital asset is divided in two parts: Short Term Capital gain and Long Term Capital Gain, with reference to period of holding asset by the assesse or by the previous owner and the assesse under certain circumstances period of holding of the asset is computed from the date of acquisition to the date immediately preceding its transfer. The period specified are:

Nature of asset

Short Term Long Term
Listed security listed in a Recognized stock exchange In India or a Unit of UTI or Specified Company or an unit Of any equity oriented fund or A Zero Coupon Bond Held for not more than 12 months Held for more 12 months
For assets other than assets specified in above Held for not more than 36 months Held for more than 36 months

Section 54EC:

This section come in to existence from 1st April, 2001, which provides that where the capital gain arises from the transfer of a long term capital asset, it will be exempt if the assesse has invested the amount of capital gain in the long term specified asset subject to the fulfilment of conditions given as under:

(1) the capital gain arises from the transfer of a long term capital asset, being land or building or both, and if the assesse invest the amount of capital gain within 6 months from the date of transfer, either in Bond of National Highway Authority of India or Bond of Rural Electrification Corporation Limited then entire amount of capital gain will be exempt. The investment made on or after 1st April, 2007, exemption limit restricted to Rs. 50,00,000 during any financial year. The bond redeemable after 3 years issued on or after 1st April 2007 but before 1st April, 2018; any bond redeemable after 5 years issued on or after 1st April, 2018.

(2) An assesse has invested in bonds the full amount of long term capital gain up to Rs. 50,00,000 will be exempt u/s 45 of the Act.

(3) If the amount invested in bonds is less than amount of capital gain, the proportionate amount will be exempt.

(4) Up to 31st March, 2015, amount of Rs, 50,00,000 is to be invested within 6 months, due to the amendment from 1st April, 2015, investment is to be made in one financial year. Formerly assesse used to get deduction of rupees one crore by doing investment between January to March and April to June. Due to this reason the word financial year is added.

(4) If the assesse obtained any loan or taken any advance amount against Bond, it will considered as income of the year in which , assesse has taken loan or advance.

(5) Assesse who has taken the benefit of Section 54EC, are not entitled for benefit of rebate u/s 88 or deduction u/s 80C.

Conclusion: Section 54EC stands as a strategic tool for taxpayers seeking relief from long-term capital gains tax. By understanding the conditions and benefits of this provision, individuals can make informed investment decisions, ensuring compliance and maximizing exemptions. However, it’s crucial to consider the evolving nature of tax laws and stay updated on any amendments that might impact eligibility or benefits.

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February 2024