LTCG Bonds –S.54EC benefit to be restricted from assessment year 2019-20 and lock-in-period will increase from 01.04.2018

[CA DEV KUMAR KOTHARI]

Links and references:

Provision which will be amended is  S.54EC of the  Income-tax act, 1961.

Popular LTCG bonds:

Popularly known, in taxpayers circle , as long-term capital gain bonds (LTCG bonds) are notified for the purpose of section 54EC are presently issued by REC an NHAI.

 At present the lock-in-period is three years. Re-investment with benefit of deduction is permitted in relation to any LTCG.

Budget proposal

As per Budget proposals, benefit of reinvestment of long-term capital gains in LTCG bonds which is available in relation to any long-term capital asset will be restricted to long-term capital assets being or building or both.

It is also proposed that LTCG bonds will have lock in period of five years as against three years at present.

As per common man purposes of incentive allowed are:

a. To raise long-term funds for specified purposes,

b. To make available long-term funds at lower rate of interest,

c. To place a lock-in-period so that the investor is not able to withdraw funds before specified period.

d. To provide an incentive to taxpayer to conserve capital by allowing saving of tax (at cost of low earning in future on such bonds). In facts tax saved causes net yield by way of interest to improve.

e. To curb a check on black money by attracting money in LTCG bonds.

No change in circumstances:

In the economic circumstances, there appears no basic change so as to make very significant changes in scheme of tax incentive. No such reason has been given that the object of section and related circumstances have changed.

Stated purpose:

The stated purpose of proposal as per explanatory memorandum is

         “ In order to rationalise the provisions of section 54EC of the Act and to restrict the scope …  

Does this mean that till date the provisions were not rational?

It appears that in name of rationalisation, personal bias is introduced. The purpose of such bonds is to raise funds for certain purposes beneficial to society at large. There appears no change in that situation. REC and NHAI both need more funds. Therefore, restricting reinvestment for land and /or building appears not a measure of rationalisation.

So far increase of lock in period to be increased from three years to five years is concerned, it can be said to be rational and in tune with long-term objectives of such bonds and fund raising. However, from the point of view of investor this measure will be irrational This is because there is low rate of interest on such LTCG Bonds, which is compensated by way of deduction allowed and tax saved. However, if the period of lock-in is increased, it may become costlier to make reinvestment with lock-in-period of five years.

An investor who has earned LTCG (which in fact is realisation of capital) can be expected to place such capital in long-term bonds to save tax  and conserve capital so that in future he can replace the asset sold.

The purpose of issuing LTCG bonds will be served irrespective of assets on sale of which assessee has earned LTCG. For example, at present certain bonds issued by  REC and NHAI are notified. So far REC and NHAI are concerned, it make no difference to them and the purpose for which such funds are raised whether the bond subscriber has earned LTCG on sale of land and / or building or any other capital assets.

Apparent mistake in proposal:

For the transfer of LTCG within 31032018, assessee can make reinvestment in such bonds within six month from the date of transfer. Therefore, for transfer which take place on say 31.03.2018 reinvestment in bonds can be made on or before 30.09.2018. However, as per proposed amendment, three years bonds should be issued on or before 31.03.2018.

As per proposed amendment, after 31.03.2018 bonds issued from 01.04.2018 should be redeemable after five years only. This curtail benefit presently allowed under the provision. This seems due to mistake in drafting proposed amendment.

Therefore, three years bonds should be allowed for reinvestment of any LTCG during FY 2017-18 (AY 2018-19) and suitable changes should be made in the proposal. Besides GOI must also ensure that such LTCG bonds are available till 30.09.2018.

Request and suggestions:

Allow issue to three years bond and make available till 30.09.2018.

The deduction should be allowed to continue in respect of all long-term capital gains and should not be restricted to land or building or both only.

The lock-in-period should be kept in two or three categories (say 3, 5 and 7 years) with varying rate of interest, so that   investor can choose LTCG Bond as he find more suitable and he has flexibility.

Re-investment of LTCG be allowed in one or more category of LTCG Bonds.

Flexibility to change over from one category to another category can be extended.

 Opportunity to avail benefit in current year:

In case any person want to reinvest LTCG on  selling  any capital assets other than land or building or both, he can plan to transfer such assets immediately and make reinvestment  before 31.03.2018 so that he can make reinvestment in LTCG bonds  redeemable  after three years.  Timely action is required because such bonds will be in high demand just before 31^st March, 2018. As per proposal w.e.f. 01.04.2018 only five years bonds will be available. Therefore, if reinvestment is not made before 31.03.2018 reinvestment will have to be made in five years LTCG bonds.

 

From: THE FINANCE BILL, 2018

20. Amendment of section 54EC.

In section 54EC of the Income-tax Act, with effect from the 1st day of April, 2019,––

(a) in sub-section (1), after the words “long-term capital asset”, the words “, being land or building or both,” shall be inserted;

(b) in the Explanation occurring after sub-section (3), for clause (ba), the following clause shall be substituted, namely:––

‘(ba) “long-term specified asset” for making any investment under this section,––

(i) on or after the 1st day of April, 2007 but before the 1st day of April, 2018, means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 but before the 1st day of April, 2018;

(ii) on or after the 1st day of April, 2018, means any bond, redeemable after five years and issued on or after the 1st day of April, 2018,

by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956) or any other bond notified in the Official Gazette by the Central Government in this behalf.’.

Clause 20 of the Bill seeks to amend section 54EC of the Income-tax Act relating to capital gain not to be charged on investment in certain bonds.

The said section, inter alia, provides that capital gain arising from the transfer of a long-term capital asset, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, shall not be charged to tax subject to certain conditions specified in the said section.

It is proposed to amend the said section so as to provide that capital gain arising from the transfer of a long-term capital asset, being land or building or both, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, the capital gain shall not be charged to tax subject to certain conditions specified in the said section.

Clause (ba) of the Explanation to the said section clarifies expression "long-term specified asset" for making any investment under the said section on or after the 1st day of April, 2007, to mean any bond, redeemable after three years and issued on or after the1st day of April, 2007 by the National Highways Authority of India or by the Rural Electrification Corporation Limited; or any other bond notified by the Central Government in this behalf.

It is proposed to substitute the said clause so as to provide that long-term specified asset for making any investment under the said section on or after the 1st day of April, 2007 but before the 1st day of April, 2018 shall mean any bond, redeemable after three years and issued on or after the 1st day of April, 2007 but before the 1st day of April, 2018 and for making any investment under the section on or after the 1st day of April, 2018 shall mean any bond, redeemable after five years and issued on or after the 1st day of April, 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf.

These amendments will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent years.

Rationalization of the provisions of section 54EC

Section 54EC of the Act provides that capital gain, arising from the transfer of a long-term capital asset, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, shall not be charged to tax subject to certain conditions specified in the said section.

The section also provides that “long-term specified asset” for making any investment under the section on or after the 1st day of April, 2007 means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by the National Highways Authority of India or by the Rural Electrification Corporation Limited; or any other bond notified by the Central Government in this behalf.

In order to rationalise the provisions of section 54EC of the Act and to restrict the scope of the section only to capital gains arising from long-term capital assets, being land or building or both and to make available funds at the disposal of eligible bond issuing company for more than three years, it is proposed to amend the section 54EC so as to provide that capital gain arising from the transfer of a long-term capital asset, being land or building or both, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, the capital gain shall not be charged to tax subject to certain conditions specified in this section.

It is also proposed to provide that long-term specified asset, for making any investment under the section on or after the 1st day of April, 2018, shall mean any bond, redeemable after five years and issued on or after 1st day of April, 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf.

This amendment will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.

[Clause 20]