Depositing money in government bonds is a good option

Last week, we carried an article on capital gains tax as applicable to transfer of immovable property. Many readers have sought details on the relief available on the tax, which are given here.

Exemptions are available only for long-term capital gains, there is no respite from tax on short-term capital gains.

Here are the exemptions available:

1. The assessee can claim full exemption if such amount is invested in house property within a certain time frame. The permissible time frame is a period of one year before or two years after the date of transfer or new house is constructed within three years.

This exemption is available when assessee had one house, which he/she has sold and the capital gains amount is reinvested in another property.

How it works

For example, you owned one house and while living in it, booked a property with a builder, which was under construction. You started remitting the purchase price in instalments from April 15, 2008, onwards.

When the new residence was ready to occupy, you sold your house of stay and moved to the new residence by March 10, 2009. In this case the entire capital gains on account of selling the old house was invested in the new house within a specified period and therefore you are entitled for exemption from paying capital gains tax.

2. If the capital gains amount is not invested in a new house before the due date of filing of returns, the amount should be invested in the capital gains account scheme of a nationalised bank. The amount can be drawn from the account and utilised subsequently towards acquisition of a new house or construction of residential unit, within the prescribed period.

Savings deposit

Suppose you have sold your house and utilised a part of capital gains to purchase a plot of land. You may need one to two years’ time to construct a house on the plot.

In such a case, you need to deposit the balance capital gains amount in ‘Capital Gains Account Scheme, 1988’ and utilise the amount for construction within the stipulated time frame of three years.

You can open such an account in State Bank of India or any other approved bank in the form of ‘savings deposit’ or ‘term deposit.’

3. Another important avenue to avoid capital gains tax is to put the amount in certain specified investments under Section 54EC of the IT Act.

The assessee has to deposit the amount within six months of transfer, to be eligible for the exemption from capital gains tax.

Every year, the Central Government announces the eligible instruments called Capital Gains Tax Bonds. Now two such bonds are available viz., Capital Gains Bonds of NHAI (National Highway Authority of India) and Capital Gains Bonds of REC (Rural Electrification Corporation Ltd.). These are redeemable after three years, earning an interest of 6.25 per cent per annum. The upper limit for investing in these bonds is Rs. 50 lakh.

(The author is the Director of Institute of Home Finance and can be contacted at deshpanderp2007