Long-term capital assets are those assets that are held by an individual for a period of 3 years or more. Profits from such assets fall under capital gains and the income is taxable in nature when the asset is transferred, exchanged, or sold. The tax on the profits gained from long-term capital assets is known as long-term capital gains tax. However, the finance ministry of India allows certain specified government entities to issue bonds that are exempt from such taxes.
The income from long-term capital gains is taxed at 20% but you can save on the taxes by investing the gains in government specified bonds for at least 5 years as mentioned under section 54EC of the Income Tax Act of India, 1961. Recently, the finance ministry approved Power Finance Corporation (PFC) for issuing bonds that are redeemable after 5 years and are tax exempt in nature.
Long-term capital assets
According to section 2(14) of the Income Tax Act, 1961, capital assets refer to any property in possession of the taxpayer. The assets include properties like land, buildings, jewellery, shares, debentures, etc. Short-term capital assets and long-term capital assets are differentiated on the basis of their possession period. If the asset is held for less than 3 years, it becomes a short-term asset. If the asset has been held for 3 years or more, it becomes a long-term asset. In the case of shares, if it is held for at least 12 months, it is considered as a long-term asset.
Section 54EC of the Income Tax Act of India, 1961
Under section 54EC, taxpayers can claim exemptions on their long-term gains if they invest the profits into long-term specified assets within 6 months of the transfer. If the asset is transferred or modified into money before 5 years from the date of investing, the exempted gain will be treated as capital gain of that year. Capital gains are calculated as a part of the yearly income and are taxable in nature.
Even if you take any loan or advance against the security of such kinds of bonds, it is considered as converting the assets into money. In such cases, the assets are again computed in the yearly income and taxed accordingly.
Features of section 54EC
Mentioned below are some significant features of section 54EC:
- An exemption is available under this section only if the capital gains are transferred.
- The capital gain should be invested in the specified asset within 6 months of making the profit.
- An exemption can only be claimed if the gains are invested in a long-term specified asset.
- The long-term assets should be held for a minimum of 5 years.
- Taxpayers can’t claim exemptions under section 80C if a claim has already been made for section 54EC.
Long-Term Specified Assets
You can claim a tax exemption under section 54EC if you invest in specified long-term assets for at least 5 years. An investment of Rs.50 lakh is allowed on such bonds. Mentioned below are the specified assets you can invest in:
- Bonds issued by Power Finance Corporation.
- Bonds issued by NHAI
- Bonds issued by National Bank for Agri Rural Development.
- Bonds issued by the Rural Electrification Corporation.
- Bonds issued by the Indian Railways Finance Corporation.
You can save yourself from paying the hefty tax amount by investing in long-term specified assets however, timely investment is key for claiming exemptions. Even after investing your capital gains in the specified assets, it is advisable to hold the assets for at least 5 years as transferring it before the stipulated period will lead to the previously exempted gains being counted in your annual income.
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