Friday, May 4, 2012

CAPITAL GAIN BOND U/S 54EC Vs CAPITAL GAIN PAYMENT


on Friday, May 4, 2012

We have received this comment on blog post BUY HOUSE SAVE CAPITAL GAIN ON SALE OF HOUSE ,I have replied Girish as required but while replying  We  have noticed that he is not very keen on taking relief given under Section 54EC.So  We have made a comparison between Investment in Capital gain Bond and payment of Capital gain and invest balance money elsewhere.After reading this Analysis it will be helpful to choose between both the product.Before this just look at main features/condition of section 54EC
  1. Long Term Capital Asset:Long term assets means any capital asset held by assessee for more than 3 Years.
  2. If assesee has sold the Long term capital asset during the previous year and made a long term capital gain then he can invest money of capital gain in Capital gain bonds and can save tax on long term capital gain.
  3. Assessee here means all type of assessees,like individual,firm company etc.
  4. Amount to be invested in bonds is only capital gain not net consideration received on sale of long term capital asset
  5. Amount exempted under this section will be amount of capital gain or amount invested in capital gain bond which ever is lower maximum upto 50 Lakh in Financial year.(however in few case 1 Crore can be invested )(Limit restricted to 50 Lakh only wef ay 2015-16)
  6. Maturity Period of bonds is Three years
  7. Capital gain bonds eligible under this section are now can be issued only by REC or NHAI
  8. Bonds can not be pledged ,sold transfer before completion of three years from purchase of bonds ,and in case its transferred then amount capital gain exempted on investment in these bonds will be made taxable in that previous year as Long term capital gain .
  9. Amount of capital gain should be invested in Capital gain bond within 6 Month from date of transfer/sale of capital asset .
so now evaluate two option and take first option 

Investment of Capital gain IN bonds 54EC

Example : On sale of long term asset suppose capital gain amount is 1000000 Rs .

Option-1: Amount of Long term Capital gain Bonds Invested in Capital Gain tax Bond ,Rate of Interest is 6.00 NHAI/REC


On investment of 1000000 rs in Bonds ,tax payout will be Nil and we will get interest 60000@ 6.00p a at the year end ,suppose we will invest 60000 interest received at the First year end and second year end @ 9% per annum annually compound rate, we will get at the following amounts at maturity .

Now Take second Option :Pay Capital gain Tax and Invest balance amount elsewhere .we have calculated the maturity amount at different interest rates compounded annually.The details are given Below on the basic of balance amount invested and amount at maturity at different Interest Rates.





So from the above we can say that if one can invest balance amount after payment of tax in such a way so that annual rate of return is more than 14.65%@ CAGR then it is beneficial to pay tax at one go as compare to investment in capital gain Bond otherwise he should invest in Capital gain bond and take benefit u/s 54EC .Though the rate of interest offered on capital gain Bond is just 6.00% but Internal rate of return (IRR) will come as 14.65(CAGR) due to out go of long term capital gain tax in first year @20 % plus surcharge on long term capital gain.


Now specific answer to his query


I have sold a residential plot recently. I acquired it in 2001 for 6.5 lacs and sold it at 44 lacs in 2008 Oct. I already own a flat from last 3 years. I believe I am not eligible to reduce capital gains under sec 54 or 54F. Not very keen on 54EC. If I want to pay tax on capital gains, how much it will be. Is there a different slab of tax with and without considering the index? Can you please elaborate.



  • Non eligible for section 54:section 54 is available only if long term asset sold is a residentila house property ,so Gisrish has correctly said that sec 54 is not vailable to him,as he has sold land not a residential house property.
  • Non eligible for section 54F:undersection 54F ,person can avail relief from paying long term capital gain tax arises on sale of long term capital asset,if he invest net sale consideration in a house in specefied time ,but he should not own more than one house at the time of transfer of long term asset other than purchased under this section(new house).In this Case Girish owned a house on the date of transfer of the property (land) so he is not correct and eligible for section 54 F 
  • Capital gain with or without indexation:For sale of land there is no option for calculation of tax without indexation and pay tax at lower rate.
  • Tax calculation:As you have not given month of plot purchase so I have assumed it as after march 2001 so on the basic of your tax calculation is given as under

    sale price=44
    indexed cost of purchase =6.5 X 582/426=8.88
    capital gain=44-8.88=35.12

    tax on capital gain 35.12 @ 20%=7.02 Lakh
  • Regarding availing relief u/s 54EF or not it depends on person to person,however necessary calculation which will be helpful in selecting right option at right time is given above.

If you have different views then please record in comment section.


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  1. I purchased 1 acre 10th cents by exchange of 40 cents worth about 1.x Lakh per cent. I purchased another 40 cents at 35000 per cent and another 50 cents for 10 Lakh per cent. We consolidated all our property in this single land by selling others. Today price of land is 10 lakhs per cent. We are not rich by measurable means, but now I wish to invest this in a manner that my mum and I could have two homes and invest in some commercial venture. I think as we are selling our present home, we can invest in two homes. I also want to invest in non conventional source of power generation ? Can we get exempt. Is there a way to save taxes any other way with good returns ?

    ReplyDelete
  2. For Details of REC 54EC Capital Gain Bonds Click here
    For Details of NHAI 54EC Capital Gain Bonds Click here


    Thanking You,

    With Regards,


    Amit M. Surpuriya

    ------------------------------------------------
    KSHITIJ FINANCIAL SERVICES
    Equities | Mutual Fund | Bonds | Insurance | Medi-Claim | Tax Planning

    Email: [email protected] | Mobile: +91 9850873688 | WebPage: http://kshitijfinancial.hpage.com/

    INVEST ONLINE IN HDFC MUTUAL FUND: CLICK HERE

    ReplyDelete
  3. Nice Post,really very informative.Thanks for sharing the information..

    ReplyDelete
  4. Thank you for such an excellent post. I want to know whether I can
    remit the proceeds of the EC54 bonds upon maturity to my country of
    residence. I bought a house ten years ago, sold it 7 years ago and put
    the profits in the NHAI bonds and now upon maturity want to remit out.
    Please advise the procedure to do it. thank you.

    ReplyDelete
  5. It is already 8 months since I got my capital gains. Now I am thinking of buying REC bonds. Can I pay tax for 2 months and avail the 54EC tax benefit after that?

    ReplyDelete
    Replies
    1. No ,you can not invest amount in capital gain bonds now as period is 6 months from date of transfer OF PROPERTY

      Delete
  6. I want to sell a Flat and use a part of the proceeds for construction of the first floor of a house that I own. I would like to know the following :
    (a) What documentary evidence is required to support of the amount spent for construction, because almost all spending will be in cash?
    (b) If the cost of construction is less than the Capital Gain, then will I have to pay Capital Gains Tax on the balance amount?
    ---- A.J.Paul

    ReplyDelete
  7. Interest on these bonds is taxable ( 30.9 %). Net interest rate will be 4.2 % .
    So can you give breakeven after that.

    ReplyDelete
  8. My husband got a property in 2002, which was 100% funded by him. The property was registered 50% to himself and 50% to my mother-in-law. She had no source of income. This property was sold in August 2013. Is the capital gains taxable 50% for my husband and 50% for my mother-in-law?
    Can my husband invest all the capital gains in buying a property abroad instead of buying the property in India?
    I appreciate your response - [email protected]

    NN

    ReplyDelete
    Replies
    1. The capital gain taxable 50 50 in your husband and mother in law account. In my opinion you can not invest in house outside India.

      Further please provide figure ,so that we can suggest you saving of capital gain

      Delete
  9. In Prema.P.Shah, Shah Vs ITO, the honorable tribunal bench held that the exemptions under Sec54 does not prohibit the re-investment property to be outside of India, provided all other conditions of the Section are met.
    My question is - is this case law still being upheld by the ITO in determination of re-investment of capital gains outside India(in our case, we propose to buy a house in USA). OR was this judgement over turned by a higher authority?

    Is it possible for us to build a case for 100% of the capital gains to be assessed in my husband's account - since he was the owner of the old property in the true sense of the word.
    We would like to use all the capital gains - approx 83lakhs to expatriate to USA and buy a house here.

    Thanks
    NN

    ReplyDelete
    Replies
    1. The above case stand valid till now ,however as the amount involved is big you should not act upon information available on net and should take professional consultant help.

      Delete