In an unexpected move, the government has made significant changes to Section 54EC of the Income Tax Act in Budget 2018, thus putting more burden on the Indian taxpayers.
The Budget 2018 has specified that the Section 54EC exemption will now only apply to capital gains from land and buildings. This effectively removes the exemption for gains from plant, machinery, unlisted shares, bonds and debt mutual funds.
It has also specified that the holding period on these bonds (provided they are purchased after 1st April 2018) will be five years instead of the previous limit of three years.
Earlier, investing in the Section 54EC Bonds upto Rs 50 lakh provided an exemption from long-term capital gains from the sale of any “long-term capital asset”. Long-term capital gains arise when you sell an asset after three years (or two years in the case of land or any immovable property) and make a profit or gain from the sale.
Equity didn’t feature in the earlier provision because there was no long-term capital gains tax on equity or equity mutual funds. However, despite the levy of this tax by Budget 2018, Section 54EC bonds will not be available to claim exemption from gains on equity.
Detailed provisions for the Capital Gains Bonds:
The maximum exemption limit by investing in these bonds is Rs 50 lakh.
You have to invest in them within 6 months of selling/transferring the asset.
They have to be issued by the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC) or any other company notified by the government for this purpose.
The interest rate on these bonds is 5.25%. This interest is taxable.
According to Budget 2018, from April 1, 2018, long-term capital gains from land and building alone can be invested in Section 54EC bonds.
This move will bring down avenues for tax exemption on capital gains. It will also reduce flow to the infrastructure bonds of NHAI and REC. Interestingly, finance minister Arun Jaitley did not mention such an important change in his Budget speech.