Know how to save tax on long-term capital gains

The tax on capital gains arising from the transfer of a long-term capital asset, being land or building or both, can be reduced by investing in specified bonds, within a period of six months after the date of such transfer. (Section 54EC of Income Tax Act)

To illustrate, Koushik sold a residential flat, which he bought 5 years back in Bengaluru for Rs 2 crore. After reducing the indexed cost of purchases, he made a long-term capital gain of Rs 60 Lakh. Now he has the option of paying tax at 20% on Rs 60 lakh or reinvesting the gain in specified capital gain bonds. To save taxes, he can invest up to Rs 50 Lakh in bonds and pay taxes on the remaining Rs 10 Lakh.

All assesses, be it individuals (including Non-Resident Indians), HUF, Partnership firms, LLP, Trust or a Company can invest in tax saving capital gain bonds. These bonds are issued by the National Highway Authority of India (NHAI), Rural Electrification Corporation of India (REC) or Power Finance Corporation Limited. These bonds are AAA-rated securities backed by the Government of India. They can be held in either physical or Demat form as per your choice.

The investment is to be done within six months from the date of transfer. Suppose, the property is sold on March 21, 2022, then the bonds are to be purchased on or before September 20, 2022.

The taxpayer is allowed to invest whole or part of the capital gain, up to Rs 50 Lakh in the bonds. Suppose, the property is held by co-owners, each of them can invest up to Rs 50 Lakh.

These bonds have a lock-in period of five years. Once the investment is done, premature withdrawal is not permitted.

Secondly, the bonds are non-transferable, non-negotiable and cannot be offered as a security for any loan or advance.

The current coupon rate is 5%, paid annually. The interest earned from the bonds is taxable.

Tax Deducted at Source (TDS) is done at the time of interest payout and hence, advance tax is to be paid, as applicable.

Now the question arises, if you have sold the shares of an unlisted company can you invest in bonds? No, tax exemption is available only in the case of the sale of land or building, whether residential or commercial or otherwise, which is held for more than two years.

Therefore, gains from any other asset like gold, shares or mutual funds are not eligible for investment in capital gain bonds.

Can one invest in bonds as well as in a house or property simultaneously? This is also permitted. One can invest in bonds u/s 54EC and also reinvest the remaining amount in another house property, subject to applicable conditions u/s 54 or 54F.

In the above-cited example, Koushik can buy bonds worth Rs 10 Lakh and purchase a flat for Rs 50 lakh to claim complete tax exemption from the sale of the flat.

There is no provision for tax exemption in case of delayed investment beyond six months from the date of sale of the asset. So, it is not advisable to invest after the specified period.

What happens in case of the death of the bondholder? If the bondholder dies before the 5 years of investment is complete, the nominee will have to continue the bond till its maturity. There is no provision for premature withdrawal even in case of the death of the bondholder.

(The writer is a CA based in Bengaluru)

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