Section 54EC Amended: Capital gains exemption on investment in Specified Bonds
Existing Section 54EC
The existing provisions contained in sub-section (1) of Section 54EC of the Income Tax Act provide that where capital gains arises from the sale of long term capital asset is wholly or partly invested in the specified bond within a period of six months from the date of sale or transfer than the proportionate amount of capital gains so invested in the long-term specified asset u/s 54EC, out of the whole of the capital gain, shall be exempted from tax. The quantum of exemption is restricted to fifty lakh rupees during any financial year.
Why was this Amendment required?
However, the word used by the existing provision “during any financial year” created an ambiguity, allowing an assessee to claim exemption twice within the period of 6 months i.e. any capital gains arises after the month of September were invested in two parts in such a way to fall under two financial years i.e., one within the year and second in the subsequent year but before the expiry of six months. This ended up with the claim for relief of one crore rupees as against the intended limit for relief of fifty lakh rupees.
For example: Sanyam sold a house in December 2013 for Rs 11 crore, earning a capital gain Rs 1 crore. Now he has invested capital gain of Rs 50 lakh in specified assets u/s 54EC in January 2014 and again Rs 50 lakh in April 2014. Now if we go by the current provision both the conditions of claiming exemptions are getting fulfilled i.e. capital gains invested in specified asses and that too within a period of six months from the date of sale or transfer. Thus he is eligible to claim exemption of Rs 1 crore while filing his ITR from Financial Year 2013-14. But this was not the intention of the lawmaker.
Accordingly, to overcome this loophole it is proposed to insert a proviso in sub-section (1)
“Provided further that the investment made by an assessee in the long-term specified asset, from capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.”
This amendment will come in effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year 2015-16 and subsequent assessment years.
Last Financial Year to take Advantage of Loophole
Since this amendment is going to come in effect from the next assessment year, so assessee who earned capital gains from the sale of long term capital asset in the second half of the financial year 2013 are still out of the purview and can still claim Rs.1 crore under section 54EC by investing sum in current financial year i.e. 2013-14 (AY 2014-15) and subsequent financial year i.e. 2014-15 (AY 2015-16) but within a period of six months.