Lesser known tax gain on investment made in specific bonds

There is a tax benefit available in the form of savings of capital gains tax when there is investment made in specified bonds. While this is something that everyone needs to look at, what is also important is that one has to avoid a situation where there can be a reversal of the benefit that has already been given. This is possible under specific circumstances but most people do not pay attention to this area and all that they look at is the manner in which the tax benefit is actually taken. Here are the conditions under which the benefit can be taken back along with the manner in which this can be avoided.

Nature of benefit:

The benefit that is available to taxpayers for investing in specified bonds under Section 54EC says that any taxpayer who has a long term capital asset on which gains have been earned then they can ensure that the capital gain tax is avoided. For this purpose the taxpayer would have to buy bonds of the National Highway Authority of India or Rural Electrification Corporation. The restriction here is that the maximum investment in these bonds in one financial year can be only Rs 50 lakh. The time period available for making the investment and saving the tax is within six months of the date of the transfer of the asset. The benefit in the form of reduction would be the investment in the new asset or the capital gains that is earned whichever is lower.

Take for example a situation where an individual has sold a house property after holding this for a period of 7 years and earned a capital gains after all workings have been done to the extent of Rs 38 lakh.  The individual has earned long term capital gains and one of the options available is to just pay the required amount of tax on the calculation and complete the transaction. However if the tax is to be saved then there can also be purchase of bonds to the extent of Rs 38 lakh so that this amount is reduced from the capital gains working and no tax has to be paid on the gains made.

Benefit taken away:

Just because the tax payer has managed to get the benefit at the time of filing their tax return does not mean that this cannot be revoked at some time in the future if the required conditions are not met. In this sense there will be several conditions related to the entire transaction that will need to be fulfilled and when this is done there will be no revocation of the benefit. The first condition for this is that the asset or the bonds in this case should not be transferred for a period of 3 years from their purchase. This means that the tax payer has to ensure that the lock in is observed otherwise the capital gains that was allowed earlier would be reversed.

This is not enough as there are some additional conditions where the benefit will also be revoked. The bonds should not be converted into money by any means and if this is done then once again the earlier benefit will have to be overturned. At the same time many people might think that the asset might not be transferred but there could be borrowings against this asset which can provide the necessary amount of liquidity. If there is any loan or advance that is taken on the security of the bonds within a period of 3 years from the acquisition of the bonds then too the benefit will be reversed. These are the additional conditions that might not be familiar to the taxpayer but they need to ensure that this is followed so that there is no trouble at a later stage.

The author can be contacted at arnavpandya@hotmail.com