Tag Archive | "Section 54 EC"

Tags: assessees, capital gains, CBDT, Infrastructure Bonds,

Long term capital assets, long term capital gain, National
Highway Authority of India, NHAI, REC, Rural
Electrification Corporation, Section 54 EC
Capital Gains> Opportunity to take double benefit on investment in
Infrastructure bonds

Posted on 04 January 2011 by Balwant Jain

There are various avenues available for availing capital gains exemption from sale of long-term
capital which also includes investments in bonds of REC and NHAI. I had touched upon this in
one of my previous articles.
So if you have earned any long-term capital gains whether from residential house property or
from any other asset and do not want to invest the money for purchase or construction of a house
property, you can invest upto Rs. 50 lacs of such long-term capital gains in bonds of either REC
(Rural Electrification Corporation) or NHAI (National Highway Authority of India) within a
period of six months from the date of sale of the original asset.
This option of investment in bonds under Section 54 EC is particularly very useful for senior
citizens who own a residential asset and do not own any other liquid asset to meet their day today
expenses. By selling the existing house, the capital gains can be invested in such bonds, which
will ensure regular cash flow in the form of interest in addition to the surplus left after
investment of capital gains..
In one of my earlier articles, I had advised that you can plan date of sale of your long-term
capital asset in such a way that the period of six months spills over in two financial years so that
you can claim the benefits of investment and consequent exemption of such long-term capital
gains upto Rs. 50 lacs in each financial year aggregating to Rs. 1 Crore in respect of a single
transaction.
Let us understand this by an example. Mr. Surendra Sharma has earned an indexed long term
capital gains of Rs. 1.25 Crores on sale of a plot of land for Rs. 4 Crore on 22nd December,
2010. He does not want to invest in any house property. He has a period of six months to invest
the capital gains to claim the benefit of Section 54 EC. His period of six months spills into two
financial years and he has the time to invest the capital gains till 21st June 2011. Since his period
of six months falls in two financial years, he can invest Rs. 50 lacs before 31st March 2011 and
remaining Rs. 50 Lacs before 21st June 2011. Had he sold his property before 1st October, he
would not have been able to invest Rs. 1 Crore in agreegate as period of six months and in that
case would have ended in the same financial year ended 31st March 2011. He could have
invested only Rs. 50 lacs against the long term capital gains of Rs. 1.25 Crore.
 Some of the readers have expressed their doubts whether one can invest
more than Rs. 50 lacs in these specified bonds in respect of a single transaction of sale, for the
purpose of claiming exemption under Section 54EC for long-term capital gains. As we are at the
fag end of the year and the period of six months will spill over in two financial years, here I
thought of clarifying the position for the benefits of the persons who have already sold or are
planning to sell long-term asset now on which the capital gain is expected to exceed Rs. 50 lacs.
But before that let us discuss the factors leading to this confusion. Firstly, a circular issued by the
CBDT on 22nd December, 2006 wherein it was stated that the investment in these specified
bonds by a person cannot exceed Rs. 50 lacs for investments made between 26th December,
2006 and 31st March 2007. Prior to issuance of this circular there were no restrictions on the
quantum upto which a person could invest in these bonds for availing exemption under Section
54 EC. This circular created an impression that one can invest only upto Rs. 50 lacs under
Section 54EC.
If one reads the circular carefully, the restriction for investment is applicable for a limited period,
between 26th December, 2006 to 31st March, 2007. The original Section was amended
subsequently to give effect to provision on a similar line w.e.f 1st April 2007 prospectively but
with some change of the words. As per the amended law the restriction of investment of Rs. 50
lacs still applies but this restriction is applicable with reference to each financial year and not
with respect to each transaction of capital gains.

The second factor leading to this doubt is the terms and conditions of issue of bonds of these two
companies. A person can not invest more than Rs. 50 lacs in each series of bonds of such
Companies. The upper ceiling on investment has been put to bring the overall amount of
investment in each series of investment in line with limits laid down in the Section 54 EC itself
w.e.f. 1st April, 2007. However one person can invest in bonds of both the companies so the
limit of Rs. 50 lacs in respect of bonds of each company does not hit you.
After reading the present provision of the law and circular, my contention is that a person can
invest Rs. 50 lacs in each of the two financial years falling within the period of six months is not
open to any dispute by the tax authorities as the wording of the section are absolutely clear and
do not leave any chance for any other interpretation. Please note that this restriction is in respect
of each financial year and not in respect of each calendar year.
So for all the assessees who have already sold some long-term capital assets very recently and
whose six months is spilling in the next financial year or who are planning to sell any long-term
capital asset fetching a capital gains of more than Rs. 50 lacs can take the benefit of investment
in Rs. 50 lacs in each financial year.

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Tags: (DP), BSE, Delhi, Demat account, Depository

Participant, e-Gold, Mumbai, National Spot Exchange, NSE,
NSEL, Section 54 EC, Section 54 F, Tax Treatment, VAT
e-Gold>>>Gold goes the e – way!

Posted on 22 November 2010 by Balwant Jain

The recent continuous rise in the prices of bullion have created fresh interest and generated
curiosity of the general public in Gold. Traditionally Indians purchase gold on all the
conceivable occasions, be it Diwali, marriage in the family, receipt of annual bonus etc. We
generally purchase gold in physical form, be in the form of coins or jewellery. But there are other
ways too in which you can purchase or invest in Gold. You can either purchase the gold in
physical form or in electronic form.

Here I would like to discuss a product called “e-Gold” which has the ideal combination of
characteristics of both the forms – physical as well as electronic. In e-Gold, gold is held in
electronic form and can be converted into physical gold with the same ease as the way you can
convert the money lying in your bank account into a physical currency.

The National Spot Exchange Limited has launched e-Gold in March 2010.

How does E-Gold work:

Since e-Gold can only be purchased in electronic form, you need to have a demat account. The
existing demat account which you are using for transacting your shares etc. does not work for
holding e-Gold units. Hence, you need to open a separate demat account with one of the
depository participant empanelled with the National Spot Exchange Limited. The list of such
depository participants can be downloaded from the web site of National Spot Exchange.

In addition to having a demat account with one of the Depository Participant (DP) empanelled
with NSEL for keeping your e-Gold units, you also need to have a client’s account with any
member of the NSEL. Presently there are around 380 trading members empanelled with NSEL,
spread across length and breadth of the country. These are spread to tier II cities like Rajkot,
Patna, Lucknow, Vijayawada, Jaipur, Jodhpur, Bhopal and Indore. The trading in the e-Gold
can be done from Monday to Friday between 10.00 AM to 11.30 PM. All the units of e-Gold
issued by the exchange are backed by equal quantity of gold in its vaults. The purchases can be
made either by making a phone call to the broker member with whom you have opened your
client account or through online trading access provided to you by the broker member, during the
business hours indicated above.

Costs involved:
The purchase of e-Gold has transaction cost implications. The broker will charge you brokerage
for purchase or sale of the e-Gold units. This varies between 0.25% to 0.50% like brokerage
charged by your share broker for purchase or sale of shares. In addition to the above broker will
recover transaction cost @ 20 per lakh, which is charged by the exchange. In addition to above
you have to pay a very small amount for each transaction of sale of units in electronic form to the
depository paricipant.

Apart from the transaction costs, you have to pay your depository participant, where you have
you demat account annual maintenance charges This is around Rs.300/- per annum. Earlier the
exchange used to charge for recovering the costs involved in storing the Gold in safe deposit
vaults. However the same has since been discontinued. You are allowed to do trading in the e-
Gold units during the day but all the outstanding position at the end of the day should result into
delivery or payment. The delivery and payment mechanism in respect of e-Gold is similar to that
of stock exchanges. In case of short delivery etc. there is an auction mechanism, the way it is
conducted in BSE and NSE.

Conversion of e-Gold into physical gold:

Like your bank where you can always request your bank to give you money in currency notes
equal to amount lying in your bank account, in case of e-Gold units also you can request the
exchange to give you physical gold equal to e-Gold units lying in your demat account. For
converting your electronic units into physical units you have to surrender the electronic units
with a request for physical gold. You have the option to take the delivery of the physical gold at
any place where NSEL has delivery centers. Presently the exchange has delivery centers in
Mumbai, Delhi and Ahmedabad.

The exchange presently offers you the option of exchanging your E-Gold units into coins/bars of
8 grams, 10 grams, 100 gram and 1Kg and any combination thereof. The exchange, levies an
amount of Rs. 200 each for conversion of 8 gram and 10 gram coins. For 100 gram coin the
charge is Rs. 100/-. For 1 Kg bar, the exchange does not charge anything. In addition to the
above charges for you will have to pay VAT and Octroi for conversion of demat units into
physical coins. The VAT rate varies from state of states. In Maharashtra VAT is 1% fixed and
Octroi applicable in case of Mumbai is 0.10%. For each case of delivery, you will have to pay
Rs. 200 for delivery charges, irrespective the quantity of the delivery desired. Please note that
these charges are levied only when the physical delivery is taken. In case the e-Gold units are
sold in electronic form, these charges are not applicable.

Tax Treatment:

The e-Gold units will be treated as Gold for tax purposes. The units should be held for more than
36 months for availing the confessional tax treatment accorded to long term capital gains and for
exemption eligibility under Section 54 F or 54 EC of Income Tax Act, 1956. You will also have
to pay wealth tax on the market value of the electronic units lying in your account as on 31st
March of each year, if the total value of your taxable wealth together with market value of e-
Gold exceeds Rs. 30 lacs.

Benefits of E-gold:
Since the NSEL operates on a pan India basis, the price quoted for e-Gold is same across India.
This eliminates the price bias due to geographical reasons. The e-Gold units have twin character
of physical assets as well as financial assets and can be liquidated like your shares. So you can
have liquidity at your will. In case of e-Gold units, the difference between the net selling price
and purchase cost is as low as Rs. 10 per gram whereas the same difference in case of physical
gold is quite higher. This ensures higher returns if the e-Gold units are purchased for investment.
Moreover since the gold is held in electronic form, you save on locker charges. An investor does
not have to worry about the purity aspect of the gold as the units are always saleable at
equivalent price of gold any time. In case you decide to take physical gold, you are given
physical gold duly certified which takes care of purity concerns.

Since the price quoted is transparent, it ensures efficient price discovery for purchase and sale,
which is not the case if you are holding the gold in physical form. Moreover it is not so easy to
sell your physical gold as is the case with E-Gold, which you can do by a click.

e-Gold has converted a physical asset into a financial asset. Now with e-Gold you can very
conveniently implement periodically, the concept of assets allocation and balancing among
different asset class like equity, debt and bullion as the cost of transaction is low.

Additional feature is with e-Gold you can accumulate gold for your social obligation in very
small quantities at very economical prices.

I feel e-Gold in due course will change the way people invest in gold in the long run and hold
their gold.