Invest in NHAI / REC bonds to avoid lock in period of 5 Years

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Invest in NHAI / REC bonds to avoid lock in period of 5 Years
Invest in NHAI / REC bonds to avoid lock in period of 5 Years

Union Budget-2018                                                                                                                    Amendment in section 54EC:

Presently section 54EC grants an exemption against any long term capital assets if the amount of LTCG is invested within a period of 6 months in specified long term capital assets. The meaning of specified long term capital assets has been given in explanation to section 54EC to mean specified bonds issued by NHAI/REC with a lock in period of 3 years. Present explanations reads as under:
“(ba) long-term specified asset” for making any investment under this 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 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).]
An amendment is proposed in section 54EC whereby the benefit of exemption u/s 54EC is restricted to land & building only. Other long term capital assets are not eligible for exemption u/s 54EC. Further, the lock in period is enhanced from 3 years to 5 years. By amending the meaning of “long term specified assets” in explanation to section 54EC.

The relevant part of the Finance Bill-2018 reads as under:

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 or by the Rural Electrification Corporation Limited. A company formed and registered under the Companies Act, 1956 or any other bond notified. In the Official Gazette by the Central Government in this behalf.’

 Now, the question arises whether the 5 years lock in period is applicable only for the capital gain accruing in the FY 2018-19 or it is applicable also for the capital gain accruing in FY 2017-18 but investment is done on or after 01.04.2018?

Going by the above amendment, it may be noted that

  1. All capital gain accruing in the FY 2018-19. Will have to compulsorily have a lock in period of 5 years for exemption u/s 54EC.
  2. As far as capital gain accruing in the FY 2017-18, the meaning of specified long term capital assets would be bond (a) with a lock in period of 3 years if investment is done before 01.04.2018 & (b) with a lock in period of 5 years if investment is done on or after01.04.2018.
To some extent, it is a retrospective amendment as the lock in period of 3 years is extended to 5 years even in respect of capital gain accruing in the FY 2017-18. So, even though investment is done within a period of 6 months, it will attract lock in of 5 years if done after 31st March 2018. Only option to avoid the rigour of 5 years lock in period is
“Invest the amount of LTCG in specified bonds issued by NHAI/REC on or before 31st March 2018”.

By Research team

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Amendment in section 54EC


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