Capital gains exemption on investment in Specified Bonds

     The existing provisions contained in sub-section (1) of section 54EC of the Act provide that where capital gain arises from the transfer of a long-term capital asset and the assessee has, within a period of six months, invested the whole or part of capital gains in the long-term specified asset, the proportionate capital gains so invested in the long-term specified asset, out of the whole of the capital gain, shall not be charged to tax. The proviso to the said sub-section provides that the investment made in the long-term specified asset during any financial year shall not exceed fifty lakh rupees.

     However, the wordings of the proviso have created an ambiguity. As a result the capital gains arising during the year after the month of September were invested in the specified asset in such a manner so as to split the investment in two years i.e., one within the year and second in the next year but before the expiry of six months. This resulted in the claim for relief of one crore rupees as against the intended limit for relief of fifty lakh rupees.

     Accordingly, it is proposed to insert a proviso in sub-section (1) so as to provide that the investment made by an assesse in the long-term specified asset, out of capital gains arising from transfer of one or more original asset, 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 take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year 2015-16 and subsequent assessment years.

[Clause 23]

Capital gains reinvestment cap prevents cross fiscal splitting to inflate exemption, clarifying aggregation across consecutive financial years. Amendment to section 54EC clarifies that investments in long-term specified assets out of capital gains from transfers of one or more original assets must be aggregated across the financial year of transfer and the subsequent financial year for the purpose of the statutory cap on exemptible reinvestment, thereby preventing taxpayers from splitting investments across years to exceed the annual limit; effective 1 April 2015 and applicable to assessment year 2015-16 onward.