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Bonds can spare you the capital gains tax



ANY profits or gains arising from the transfer of a capital asset in a particular financial year is liable to tax under the head 'capital gains', and is deemed to be the income of the financial year in which such an asset is transferred/sold. Broadly, capital asset means property of any kind held by the tax payer and includes immovable property, jewellery, shares, archaeological collections, drawings, paintings, sculptures, any work of art, etc.

LONG TERM VS SHORT TERM

It is important to make a distinction between long-term capital assets vis-à-vis short-term ones as the capital gains arising from the same is subject to tax at different rates under the Income-tax Act, 1961 (the 'Act'). Furthermore, few exemptions are also restricted to capital gains arising out of long-term capital gains.


   In the case of a capital asset — other than equity shares/specified securities — held for more than 36 months and transferred/sold subsequently, the capital gains are treated as long term capital gains. In the case of equity shares/specified securities, long-term capital gains would arise if they are held for more than 12 months. Otherwise, the capital gain is treated as short-term capital gain.

INVESTMENT IN CERTAIN BONDS

Besides other exemptions available under the Act, an important exemption is in respect of investment made by the tax payer in specified long-term bonds. In the case where the capital gain arises from the transfer of a long-term capital asset, the tax payer may within a period of six months after the date of such transfer invest the whole or any part of such capital gain in the long-term specified bonds, and claim the necessary exemption.

SPECIFIED BONDS

The long-term specified bond refers to any bonds redeemable after three years and issued by the National Highway Authority of India or by the Rural Electrification Corporation. If the cost of the long-term specified bonds is not less than the capital gain arising from the transfer of the asset, the whole of such capital gains shall be exempted. However, if the cost of the long-term specified bonds is less than the capital gains arising from the transfer of the asset, then the tax payer can claim a proportionate exemption in respect of the investment made in long-term specified bonds vis-à-vis capital gains.


   It is pertinent to note that effective April 1, 2007, the investment limit in the specified bonds during any financial year has been restricted up to Rs 50 lakh.

EXEMPTION TO ALL TAX PAYERS

This exemption in respect of investment in the specified bonds is available to all types of tax payers unlike many other exemptions in respect of capital gains wherein the benefit is generally limited to an individual or a Hindu Undivided Family.

CAUTION POINT

If the long-term specified bond is transferred or converted into money any time within a period of three years from the date of its acquisition, the amount of capital gains exempt earlier is deemed to be the capital gain and is taxable in the financial year in which such a bond is transferred or converted into money.


   Furthermore, if the tax payer takes any loan or advance on the security of said bonds, it would be deemed as if that he has converted the bonds into money on the date on which such loan or advance is taken. Consequently, the capital gain exempt earlier would be taxable in the financial year in the year in which such loan or advance is taken.


   Finally, investment into specified bonds offers good investment option for a tax payer to claim exemption in respect of capital gains arising from a long-term capital asset. However, necessary caution should be exercised in respect of the conditions specified above in order to claim the benefit.

 

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