If you have transferred long term Capital asset during the previous year and on the same if you have earned capital gain, usually you have to pay substantial amount of taxes. But, such tax can be claimed as exempted under Section 54EC, if the amount of capital gain is invested within six months in infrastructure-related bonds of NHAI or REC under Sec. 54EC.

National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC) are the only companies allowed to issue such bonds. For claiming this benefit under section 54EC you should invest the whole (or any part of) capital gain in any of these bonds redeemable after 3 years (3 year lock in period) issued on or after April 1, 2006 within six months from the date of transfer.

The investment in bonds said above during any financial year cannot exceed of Rs. 50 lakh i.e., the ceiling on this investment is Rs 50 lakh per financial year. The bonds can be held in both demat and physical forms.

The rate of return on these bonds is very low compare to Employees Provident Fund (EPF) and Public Provident Fund (PPF) which offers higher rate of return. Currently, both REC and NHAI are offering 6% interest on their bonds. BUT these bonds offer tax benefits under Section 54EC, which to some extent compensate the low return.

These bonds are neither transferable nor negotiable. Also, these cannot be kept as security for loans or advance. However this is a risk-free investment and has no brokerage cost.

Amount of Exemption – The amount of capital gains generated on transfer of capital asset or the amount of investment in above stated bonds, whichever is lower is eligible as exemption u/s 54EC.

Lock-in-period – The lock in period of these bonds is 3 years.

If Bonds transferred within 3 years – Bonds cannot be pledged, sold transfer before completion of three years from purchase of bonds, and in case its transferred then amount of capital gain arising from the transfer of original asset which was not chargeable to tax, will be deemed to be the income by way of long term capital gains of the previous year.

We at Taxmantra.com have the expertise in handling individual taxation; do let us know, in case you require any assistance in your taxes.