Section 54EC offers exemption if long-term capital gains are reinvested within 6 months in Bonds issued by NHAI and REC which are redeemable after 3 years. Unfortunately, the Finance Act 2007 (FA07) has slapped a limit on such contributions of Rs 50 lakh per FY. The Bonds are non-transferable, non-negotiable and cannot be offered as a security for any loan or advance. The interest rates are flexible and change from time to time. The current rate is around 6% p.a., payable annually and is fully taxable. There is no TDS.
Those who earned high capital gains during the latter part of the year found themselves to be in an advantageous position to claim exemption up to Rs 1 crore by contributing Rs 50 lakh to these Bonds during the current FY and another Rs 50 lakh during the next FY, but within 6 months. In other words, if the period of 6 months from date of sale overlapped two financial years, potentially Rs 1 crore could be invested instead of Rs 50 lakh.
Since this was not the intention of the legislation, FA14 has taken a corrective action by providing that the total relief obtained in such cases shall not exceed Rs 50 lakh though investment can be made during the FY when the CG occurs and the subsequent FY but within the stipulated period of 6 months.
Given the above, this week we shall examine the the following court verdicts in respect of Sec. 54EC—
On every Rs 100 invested in the Bonds, you save Rs 20.6 by way of tax. Thus your effective investment is Rs 79.4. At the end of its term of 3 years, you get Rs 100.
This works out at 7.99% p.a., and this portion is not taxable since it is your capital that is being returned to you. You also get Rs 6 for 3 successive years by way of interest. Assuming that you are also in the 20% tax bracket, the after-tax amount is Rs 4.764. In other words, you get Rs 4.764 on your investment of
Rs 79.40 works out at 6.00%. Thus, the total returns are 13.99% (= 7.99 + 6.00). This figure is an approximation since the two percentages are not additive. The actual figure is 13.57% and this return is after-tax!!
Any which way you look at it, investing in these bonds is like getting to save tax and also get paid for it!!
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