Nowadays every taxpayer is eager to discover avenues whereby he or she can reduce the tax liability.
One of the most celebrated ways to reduce tax is to invest in capital gain bonds. Here we will talk about National Highway Authority of India (NHAI) or by the Rural Electrification Corporation Ltd [or any other notified bonds].
Any long-term capital (arising on transfers that take place on or after 1.4.2000) shall be exempt if the whole of the amount of such capital gain is invested in long-term specified assets i.e. bonds issued by National Highway Authority of India (NHAI) or by the Rural Electrification Corporation Ltd. (or any other notified bonds) (w.e.f. 1-4-2018) i.e. A.Y. 2018-19 with in a period of six months from the date of transfers.
What is NHAI & REC?
NHAI & REC are Capital Gain Bonds which have been issued by national Highway Authority of India (NHAI) and Rural Electrification of India (REC), respectively. The rate of interest which is available to bond holders is 5.25% and is payable annually. One point of consideration for bond owners is that the interest received from Capital Gain Bonds is not covered under Section 54EC.
How much NHAI & REC bond can I purchase?
- The amount of investment in long-term specified assets by an assesee during a financial year shall not exceed Rs. 50 Lakhs.
- The amount of investment should be out of capital gains arising on transfer of one or more original assets during the financial year in which such original asset are transferred and in the subsequent year, shall not exceed Rs. 50 Lakhs.
- Bonds shall be redeemable after 3 years.
- The bonds can not be converted into money or load with in three period of years.
- If converted the long-term capital gains shall be taxable in the year converted.
Important Conditions Related to NHAI & REC Bonds
- The deduction under section 80C shall not be allowed if exemption claimed in respect of specified bonds.
- Where an original asset is transferred by way of compulsory acquisition then in relation to any additional compensation awarded to the assessee, the period of six months for investing in long-term specified assets, shall be reckoned from the date of receipt of such additional compensation.
- Deduction u/s 54EC shall be available in case of capital gains arising out of transfer of depreciable asset, if investment is mad out of sale proceeds towards specified bonds.
What return can I expect from Capital Gain Bonds?
As discussed earlier, we get an annual interest of 5.25% on capital gain bonds. To make things simple & clear, we will take an example and show you the total return on your investment.
Suppose Mr. Narendra has the following case:
|Capital Gains||40, 00, 000|
Tax Savings @ 20%
Interest Earned @ 5.25% p.a (1st year)
Interest Earned @ 5.25% p.a (2nd year)
Interest Earned @ 5.25% p.a (3rd year)
8, 00, 000
2, 10, 000
2, 10, 000
2, 10, 000
|Total Benefit generated||14, 30, 000|
|% of return in 3 years||37.75%|
|Per Year Return||11.91%|
Thus, we find that the rate of interest on Capital Gain Bonds is less than interest on fixed deposits (7% p.a), but the main intent behind investing in capital bonds is to reduce the tax burden and promote investment in highly stable bonds.
Have questions? Let us know in the comment section and we shall attend it at the earliest.
Recent Amendments and Updates on NHAI or RECL or Other Notified Certain Bonds u/s 54EC
- Long-term specified asset means the bonds redeemable after 3 years issued on or after 1.4.2017 by the National Highway Authority of India (NHAI) and the Rules Electrification Corporation Ltd. (RECL). Amendment made by the Financial Bill, 2017.
- In order to widen the scope of the section for sectors which may raise funds by the issue of bonds eligible for exemption under section 54EC, the bill has amended section 54EC so as to provide that investment in any bond redeemable after three years which is to be notified by the Central Government in this behalf shall also be eligible for exemption.
Example on NHAI or RECL Bonds Exemption
- X acquired shares of Rs. 5,00,000 of xyz LTd. on 15-12-1998
- X sold these shares of Rs. 20,50,000 on 15-5-2016
- Expenses was on transfer rs. 20,000
- x invested 3,00,000 in Rural Electrification Corporation Ltd. on 16-10-2016.
Capital Gain Calculation
|Less: Indexed cost of acquisition 5,00,000 x 1125/351 (see cost Inflation Index)||16,02,564||16,22,564|
|Long Term capital gain||4,27,436|
|Less: exemption under section 54ec (RECL bond)||3,00,000|
|Taxable Long-term capital gain||1,27,436|