Calculating Capital Gains Tax Exemption for Investing in Bonds

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  1. vivek_taxquery

    vivek_taxquery New Member

    Hi,

    I have a query on the extent to which tax exemption will be available for LTCG in case I invest the gains in Tax free bonds.

    In case I invest the gains in property, as I understand, the formula is as follows:--

    Amount eligible for tax deduction
    = (Amount Invested / Net Consideration) * LTCG

    Example, if LTCG= 60 lakhs, Net Consideration = 80 Lakhs and Amount invested in the new property = 50 lakhs, then the
    Amount eligible for tax deduction= (60/80) * 50 = 37.5 Lakhs

    Which means if I buy new property worth 50 Lakhs, then I am eligible for deduction of 37.5 Lakhs.


    However, If I invest the same 50 Lakhs in Bonds (REC, etc), then will the above same formula again apply,
    or will I be eligible for a deduction of 50 Lakhs?


    Also, can I invest the capital gains amount partially in bonds and partiallyin new property?


    Many thanks to the knowledgable and very helpful members of this forum!

    Regards,
    Vivek.
     
  2. rudrabose

    rudrabose Active Member

    Dear Vivek

    In case you invest in Bonds under Section 54EC, the computation of Exempted Capital Gains is fairly simple.

    The entire amount that you invest in such bonds is exempted from Capital Gains.

    For eg: If Capital Gains arising from sale is Rs. 20 Lakhs and you have invested Rs. 15 Lakhs in Bonds under Section 54EC, you can claim exemption of Rs. 15 Lakhs.

    The sale price of asset is not important in this case. Only the Capital Gains and the Amount invested is important.
     
    vivek_taxquery likes this.
  3. vivek_taxquery

    vivek_taxquery New Member

    Thanks, Rudra!

    Also, can I invest the capital gains partly in Bonds and partly in New house?

    In this case, my understanding is that I can claim full exemption for the amount invested in bonds, while the exemption for amount invested in new house will be calculated as per the above formula, i.e.
    Amount eligible for tax deduction
    = (Amount Invested / Net Consideration) * LTCG

    Please let me know if my understanding is correct.

    Thanks and Regards,
    Vivek.
     
  4. rudrabose

    rudrabose Active Member

    Dear Vivek

    Yes, you can invest partly in Bonds and partly in Real Estate and claim exemption for both of them.
     
    vivek_taxquery likes this.
  5. rudrabose

    rudrabose Active Member

    As far as exemption for purchase of real estate is concerned, I request you to kindly confirm whether you intent to take benefit of exemption under Section 54 or under Section 54EC.

    The treatment under both the sections is different.
     
    vivek_taxquery likes this.
  6. vivek_taxquery

    vivek_taxquery New Member

    Dear Rudra,
    As I would be investing the capital gains partly in Bonds and partly in new property I would like to take benefit for Section 54EC for Bonds and Section 54 for the new property to be purchased.

    I referred to the following link to get further info on both these sections:--
    http://www.charteredclub.com/section-54/

    Regards,
    Vivek.
     
  7. rudrabose

    rudrabose Active Member

    The article for which you have shared the link clearly states that in case of Section 54, you only have to invest Capital Gains. And the Capital Gains invested by you would be exempted.

    In case of Section 54EC, the total net consideration is to be invested and in case the purchase price of property is less than net consideration, in that case the formula would be applied.

    In your case, as you are making use of Section 54 - therefore the computation is simple. Formula wont be applied and the amount invested by you would be exempted.
     
  8. rudrabose

    rudrabose Active Member

    Therefore in your case, the computation is fairly simple:-

    Capital Gains
    (Less) Amount invested in Residential Property under Section 54
    (Less) Amount invested in Bonds under Section 54EC

    Whatever amount is invested by you is allowed to be claimed as an exemption.
     
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