Capital gain on transfer of long-term capital asset not to be charged under-investment of securities

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About Section 54EA

Capital gain on the transfer of long-term capital assets is not to be charged in the case of investment in specified bunds or debentures.—(1) Where the capital gain arises from the transfer of a long-term capital asset (the capital asset so transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within six months after the date of such transfer, invested the whole or any part of the net consideration in any of the bonds, debentures or units of any mutual fund referred to in clause (23D) of section 10 specified by the Board in this behalf by notification in the Official Gazette (such assets hereafter in this section referred to as the specified bonds or debentures), the capital gain shall be dealt with by the following provisions of this section, that is to say,—

(a) if the cost of the specified bonds or debentures is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;

(b) if the cost of the specified bonds or debentures is less than the net consideration in respect of the original asset, so much of the capital gain bears to the whole of the capital gain the same proportion as the cost of acquisition of the specified bonds or debentures bear to the net consideration shall not be charged under section 45.

(2) Where the specified bonds or debentures are transferred or converted (otherwise than by transfer) into money at any time within three years from the date of their acquisition, the amount of capital gain arising from the transfer of the original asset not charged under section 45 based on the cost of such specific! bonds or debentures as provided in clause (a) or clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head "capital gains" relating to long-term capital assets of the previous year in which the specified bonds or debentures are transferred or converted (otherwise than by transfer) into money.

Explanation.— In a case where the original asset is transferred and the assessee invests the whole or any part of the net consideration in respect of the original asset in any specified bonds or debentures and such assessee takes any loan or advance on the security of such specified bonds or debentures, he shall be deemed to have convened (other than by transfer) such specified bonds or debentures into money on the dale on which such loan or advance is taken.

(3) Where the cost of the specified bonds or debentures has been taken into account for clause (a) or clause (b) of sub-section (1), a rebate with reference shall not be allowed under section 88.

Explanation.— For this section,—

(a) "cost", about any specified bonds or debentures, means the amount invested in such specified bonds or debentures out of the net consideration received or accruing as a result of the transfer of the original asset;

(b) "net consideration", about the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by the expenditure incurred wholly and exclusively in connection with such transfer.

Analysis

Investors can avail of tax benefits under Section 54EA of the Income-tax Act, 1961, by investing in Bonds issued by a public financial institution to deploy these funds towards infrastructure projects. The Central Board of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance, Government of India has to vide its notification no. 10279 dated March 4, 1997, declared the Bonds issued by ICICI Bank as specified assets for the purposes of+ Section 54EA of the Income-tax Act, 1961. Investors desirous of availing tax benefit under Section 54EA of the Income-tax Act, 1961 from payment of tax on capital gains can invest in this Bond.

Under Section 54EA of the Income-tax Act, the capital gain, viz. the difference between the price on transfer and the indexed cost of acquisition of a long-term capital asset will not be subjected to tax if the net consideration is invested in specified bonds, debentures, units or any of the assets in terms of and subject to compliance of certain conditions as mentioned therein. The investment in Tax Saving Bonds (Options I & II) of the Company would be eligible for exemption under Section 54EA, under Notification No. 10279 dated March 4, 1997, issued by the CBDT.

Under Section 54EA Long-term capital assets are transferred and the type of transfer is Long Term Capital Gains, the New asset which is purchased include Specified securities which involve government securities, savings certificates, units of UTI, specified debentures, etc. The Time Limit for such investment in a new asset is to be done within 6 months from the date of transfer.

The Exemption Amount is equal to the cost of the new asset x Capital Gain / Net consideration (maximum up to the capital gain)

The Additional Conditions about the assets being sold under this section are if a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon and if a loan is taken on the security of the new specified asset within 3 years, the same will be treated as capital gains.

Tax Saving Bond is eligible security for Section 54EA of the Income-tax Act, 1961. Under Section 54EA of the Income-tax Act, the capital gain, viz. the difference between the price on transfer and the indexed cost of acquisition of a long-term capital asset will not be subjected to tax, if the net consideration is invested in approved instruments in terms of and subject to compliance of certain conditions as mentioned therein. By subscribing to Tax Saving Bond, an investor can avail of benefits under Section 54EA. The investor is required to invest the net sales realization in the approved securities which needs to be held for three years. If any investor claiming benefit under Section 54EA of the Income-tax Act, 1961 pledges these Bonds as eligible security for any loan taken by him at any time during three years from the Deemed Date of Allotment, he/she would stand to lose the relevant tax rebate/benefits and would be required to pay tax as per the provisions of the said sections. The CBDT has clarified that for Section 54EA, investors would be allowed to obtain a benefit under this section if the application is made within the stipulated time limit of 6 months to the extent of allotment made. Since the Central Board of Direct Taxes (CBDT) has notified Capital Gains Bond as eligible security for investment for Section 54EA of the Income-tax Act, 1961, any investor claiming such exemption from payment of capital gains tax, will, as per Section 54EA not be permitted to pledge these Bonds as eligible security for any loan taken by him/her during three years from the Deemed Date of Allotment.