The government should consider revising the present limit of investments in the bonds in a FY to not only boost infrastructure but also remove hardship caused to assessee because of the current ceiling.
Income tax has a direct nexus with income. As soon as there is any sort of income, the question of tax thereon is bound to arise. Inter-alia, income tax is also levied on income arising as a result of a transfer of a capital asset viz. jewellery, securities, immovable property etc. Such income is chargeable to tax as capital gains under the direct tax laws of India.
Now, imagine a scenario wherein a person not only saves tax on capital gains but also has the added advantage of contributing to the betterment of infrastructure in our country.
Section 54EC of the Income-Tax Act, 1961 provides for exactly the aforesaid benefit. According to the said section, depending on the amount invested, the entire or proportionate capital gains arising on the transfer of a long-term capital asset would be exempt if the gains are invested in specified capital assets within six months from the date of the transfer of the original capital asset.
The Act presently imposes a limit of investment of Rs 50 lakh in a particular financial year (FY). The investment so being made should be for a minimum period of three years from the date of acquisition. If not, the capital gain which was exempt in the first instance would be considered as income in the FY in which the investment is redeemed. However, one needs to be cautious that in case he or she obtains a loan/advance on the security of the specified asset which they acquire, they would be denied the exemption in respect of the capital gains accruing to them.
Until 31 March 2017, specified assets was defined to include any bond, redeemable after three years issued by the National Highway Authority of India (NHAI) or by the Rural Electrification Corporation Limited (REC). However, the government through Finance Act, 2017 amended the Act to include any other bond notified by it in this behalf.
Though the aforementioned provisions allow a person to save on taxes, there are two supposed hurdles in its real success. The first being the very limited choices available for investing in prescribed bonds and the second being the limit of Rs 50 lakh of investments in each FY.
With regards to the first, the government has already initiated the process of widening the choices for persons by amending the Act to include notified bonds as specified assets. The Indian infrastructure in the field of roads as well as rural infrastructure has experienced good results over the last ten years and though there is still a lot of work to be done in these sectors, it was time that new sectors are also looked at.
Acting rightfully in this direction, the government has notified two additional categories of bonds. While, in June 2017, bonds issued by the Power Finance Corporation Limited were notified, in July this year bonds issued by the Indian Railway Finance Corporation Limited were also included the list. Thus, it can be said that the government is now also focusing on other sectors such as power and railways which collectively would help the country to have a good infrastructure environment.
It can be said that a good beginning has been made in notifying these bonds, but the government should consider notifying more of such bonds which would be issued by other infrastructure companies.
Coming to the second hurdle, it may be noted that the limit of Rs 50 lakh was imposed ten years back. The said limit was imposed with a rationale to help small investors to avail the benefit of the provisions of section 54EC. Initially, when this section was inserted the bonds notified by the government were subscribed in entirety by big business houses. The bonds being limited could not be obtained by many small investors. To avoid such a scenario, the government imposed the limit of Rs 50 lakh.
However, since then, property prices have risen and as a result the capital gains accruing to a person on transactions have also increased. With additional bonds being notified, the number of people, including small investors subscribing to these bonds, would also increase with the limit still being the same.
A person saves for a lifetime to acquire a place which he can call a home and it would be harsh if he has to pay tax on selling that property to move to a better place. Moreover, transfer of a property would entail capital gains in that year only and the person at present cannot make investments in instalments in two different FYs if the capital gains accruing to him are greater than Rs 50 lakh.
Therefore, the government should consider revising the present limit of investments in the bonds in a FY to not only boost infrastructure but also go a long way in removing hardship caused to assessee because of the current ceiling.
In the end, it can be said that the mechanism of exempting capital gains which is there in the Act helps a person in saving tax without any cost to him. On the flip side, some funds are locked in for at least three years. However, the funds so received by the government helps in developing the country’s infrastructure and any citizen contributing to this would be proud in doing so.
(The author is National Leader Tax – Grant Thornton India LLP. With inputs from Siddhartha Sangal and Adityavikram Rathore)