• MERWIN RICHARD

Capital gain on the transfer of long-term capital assets is not to be charged in certain cases.

Updated: Sep 30

#IncomeTaxAct1961, #Section54EB, #Capitalgain, #Longterm, #Capitalassets #Rules, #Sections, #Acts, #Law


54EB of the Income Tax Act 1961, talks about the Capital gain on the transfer of long-term capital assets not to be charged in certain cases.—(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 a period of six months after the date of such transfer invested the whole or any part of capital gains, in any of the assets specified by the Board in this behalf by notification in the Official Gazette (such assets hereafter in this section referred to as the long-term specified assets), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—

(a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45;

(b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under section 45.


According to Sections 54EB of the Income-Tax Act, 1961, a person can save tax on long-term gains if he were to make an investment in certain mutual funds as also shares of infrastructure companies. This is a good provision and will benefit investors. However, one of the conditions mentioned is that if the company raising the money through share capital, etc. for infrastructure projects fails to deploy the funds as prescribed under the IT Act within the prescribed time limit, then the approval so granted may be withdrawn by the Central Board of Direct Taxes.


The government's intention in imposing this restriction is to ensure that infrastructure companies issuing bonds, shares or debentures utilize the money for infrastructure facilities. But the problem is that if at a later stage the approval granted by the CBDT to a particular company is withdrawn due to a lapse by the company, the poor investor will lose the benefit of tax exemption under Section 54 EA or Section 54EB. The government should, therefore, modify the provisions in such a manner that the investor is not put into trouble due to a violation by a company.


Under this Section, Long-term capital assets are transferred and the type of transfer is Long Term Capital Gains, the New asset which is purchased includes specified securities - including government securities, savings certificates, units of UTI, specified debentures, etc. Time Limit for investment in the 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 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.

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