Capital gains parking easier as cap on bonds removed

Investors may not have to scramble to invest their capital gains from property deals in capital gains bonds in the coming fiscal with the government lifting the cap on the amount, which the two issuers, Rural Electrification Corporation (REC) and the National Highways Authority of India (NHAI), of such bonds can raise.

From 07-08 onwards, REC and the NHAI will not be hamstrung by a ceiling imposed this fiscal on the quantum of funds they can raise. The finance ministry had capped the amount, which these two entities could raise through such bonds issuance at Rs 9,500 crore in 06-07.

No such limits will hold in the coming fiscal as the ministry has chosen to give up its powers to prescribe a ceiling. This fiscal, after a ceiling was imposed, many investors had to sit out after the bonds were lapped up quickly by the early birds.

Investments in these bonds, popularly known as 54EC bonds, have an average lock-in of three years. Gains from transfer of a capital asset have to be invested in such bonds within six months of their realisation if the investor wants to avoid paying tax.

Otherwise, if an individual or a trust sells a capital asset like immovable property 36 months from the date of acquisition, gains from such sale would be treated as long-term capital gains tax and taxed at 20% with indexation benefits.

Last year, the government signalled its intent to phase out several tax sops. But it has retained the capital gain tax exemption given to investors of 54 EC bonds.

In 2006-07, two issuers, REC and NHAI, were allowed to raise Rs 9,500 crore by issuing 54 EC bonds. REC was allowed to raise up to Rs 8,000 crore and NHAI, Rs 1,500 crore. REC raised Rs 4,500 crore in the first tranche, while it raised Rs 3,500 crore in the second phase.

In the first tranche, investors were allowed the flexibility to invest any amount in these bonds. However, when REC was authorised to raise money in the second tranche, the government set a limit of Rs 50 lakh for each applicant. The cap on the amount that an individual investor can invest has been retained at Rs 50 lakh. This window is open to companies and partnership firms, among others.