Devasana, who is an NRI based out of UK, sold her inherited property in December 2022. She made a long term capital gain of about Rs. 78 Lakhs. She does not want to re-invest in another house property as in the long run, she intends to repatriate the funds to UK for her needs there. Leaving that option out, she decided to invest in Sec 54EC Capital gain Bonds in two tranches – first one before March 2023 for Rs, 50 Lakhs and the second lot in April or May 2023 for the remaining Rs. 28 Lakhs. She is wants to know if this option of investing in two tranches in consecutive financial years would help her avoid capital gain tax.
LONG TERM CAPITAL GAINS & TAXATION:
Long Term Capital gains on sale of house property is taxed at 20% plus applicable surcharge and cess. Capital gain taxes can be avoided if specified investments are made. Re-investing in another house property within specified time lines as per provisions of Sec 54 of the Income Tax Act is one option. But since Devasena does not intend to invest in another property in India, that option is ruled out.
54EC Bonds
The other option available for Devasena is to invest the long term capital gain from sale of the inherited property in specified asset (being NHAI bonds, REC bonds, PFCL bonds, IRFCL bonds or any other bonds as may be specified by the Central Government) under section 54EC of the Income Tax Act, 1961, to claim deduction against such long term capital gains.
While investment in specified bonds is a well known tax saving exemption, one should keep in mind a few key pointers:
1. Eligible Original Asset:
Sec 54EC exemption is available only for Capital gains arising out of transfer of a Long Term Capital Asset, being Land or Building or both.
2. Quantum of Re-investment:
The maximum investment that can be made by a tax payer for this purpose is Rs. 50 Lakhs. There are few riders with respect to the re-investment:
a) Maximum amount of exemption available u/s 54EC is Rs. 50 Lacs.
b) The investment in specified bonds during the financial year in which the original asset is transferred and in the subsequent financial year should not exceed Rs. 50 Lakhs.
In Devasena’s case, although she plans to invest in specified bonds in two consecutive years, the maximum amount of exemption available u/s 54EC cannot exceed Rs. 50 Lakhs.
3. Time limit:
Investment must be made within 6 months from the date of transfer of the original long term capital asset.
In Devasena’s case, she must invest in specified bonds before end of June 2023 to avail the exemption u/s 54EC.
How can we help you?
Various clauses from the Income Tax Act may be simplified in online contents. But most of the time, it requires professional help in identifying suitable route for specific instances. Similar to nurturing and taking care of personal health, it is important to also keep a tab on one’s financial health. We at Chockalingam Unnamalai & Associates, can help you understand the pros and cons of various choices you make in the context of personal taxation. You can bank on us for a stress free tax filing and related compliances.
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