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All about NHAI capital gains bonds

Source : SIFY
Last Updated: Fri, Dec 05, 2008 13:34 hrs

Good news for all those who have earned long-term capital gains. The related tax is exempt under Section 54EC, if the amount of capital gains is invested within six months in infrastructure-related bonds of NHAI or REC under the umbrella of Sec. 54EC. The ceiling on this investment is Rs 50 lakh per financial year.

How to earn tax-free income

There is an alternative for claiming the exemption under Section 54 or 54F by purchasing a residential house within one year before or two years after the date of sale of the old house.

Alternatively, a residential house may be constructed within 3 years from the date. Sec. 54 is applicable to capital gains arising from transfer of a residential house and requires the amount of capital gains to be reinvested, whereas Sec. 54F is applicable for other assets and requires the net sale proceeds (after the related expenses) to be reinvested. Those who do not need another residential accommodation can fall back on such bonds.

Effective rate of bank deposits is high

Unfortunately, the windows of these organisations open and close very often for accepting such deposits. This results in giving rise to some periods during which anyone desiring to take advantage of this Section finds frustratingly that he cannot do so.

Effective rate of bank deposits is high

Fortunately, now National Highways Authority of India (NHAI) has come out with its on-tap bonds up to March 31, 2009, without any further notice or at an early date as may be decided by NHAI at its absolute discretion, if the ceiling limit allowed by Central Board of Direct Taxes (CBDT) to raise the funds is achieved.

NHAI reserves the right to refund the amount collected in excess of the ceiling limit without assigning any reasons.

The minimum application shall be for five bonds of Rs 10,000 each. The aggregate investment in REC and NHAI during the FY should not exceed Rs 50 lakh. Full subscription is required to be accompanied along with the application.

Maturity is three years at par from the deemed date of allotment. The bonds are non-transferable, non-negotiable and cannot be offered as a security for any loan or advance.

Coupon rate is 5.75 per cent, payable annually and it is fully taxable. The interest on the bonds will be payable for the period from the deemed date of allotment till the last day of the FY i.e., March 31st on the first bank working day of the next financial year.

The interest payment for the first and last year or part thereof ending with the date of redemption shall be proportionate on a 365 day-a-year basis. The interest payment on the bonds shall be made to the registered bondholders recorded in the books of NHAI on the record date i.e., 30 days prior to the respective interest payment date.

Tax deduction at source is not applicable. ECS facility is available.

Subject to the completion of all legal requirements, NHAI will issue the bond certificates (in case of physical option) within three months from the deemed date of allotment or such extended period as may be decided by NHAI. For investors opting for dematerialised mode, the bonds shall be credited to the depository account indicated by the investor.

NHAI reserves the right to revise the terms of the bond including the coupon rate in its absolute discretion either through issue of information memorandum or making an announcement in all editions of The Economic Times and The Times of India. The revised terms shall be applicable only to bonds allotted in respect of applications made after notification of the revised terms.

Crisil as well as Fitch Ratings have assigned “Triple A” rating to the long-term borrowing programme of NHAI under which these bonds are issued. These ratings indicate highest safety with regard to timely payment of interest and principal.

To be or not to be

If you are contemplating to pay the tax on capital gains and invest the remaining funds elsewhere more gainfully, think again. The following table proves that even if you are in the modest tax zone (BER) of 10.3 per cent, the break-even rate of the bonds would be 15.65 per cent! For higher tax zones, the BER would be higher. Let us walk through the table.

Suppose the amount of long-term capital gains is Rs 10,000. The tax thereon is Rs 2,060 and you will have Rs 7,940 in hand. If this amount is invested in an avenue paying as high a rate of interest as 15.65 per cent p.a., you will have Rs 11,775 at the end of 3 years.

If you buy the NHAI bonds, no tax is payable and at the end of its term of three years, you will have Rs 11,775 on hand. Therefore, the break-even rate is 15.65 per cent. In other words, you will have to earn more than 15.65 per cent, if you decide not to invest in the NHAI bonds. If you are in higher tax zones, the break-even rate will be higher.

To conclude, if you have earned long-term capital gains, park the long-term capital gains in these bonds, unless you need a residential house.

NABARD --- To be or not to be?

Bonds interest 5.75% Fully taxable
FDs interest 15.65% Fully taxable
Income tax zone 10.30%  
Tax rate on LTCG 20.60%  

More India business stories

Untitled Document

Deposit in Co-FDs

Deposit in Bonds

Amount of capital gains

10,000

Amount Deposited in Bonds 10,000
10,000

Tax thereon

2,060

Amount available for co-FDs

7,940

Year

Capital

Interest @

Interest

Capital

Opening

Interest @

Interest

Interest

Bond Int

Closing

Op Bal

15.65%

After tax

Cl Bal

Balance

15.65%

After Tax

After Tax

Balance

1

7,940

1,242

1,114

9,054

-

-

-

575

516

516

2

9,054

1,417

1,271

10,325

516

81

72

575

516

1,104

3

10,325

1,616

1,449

11,775

1,104

173

155

575

516

1,775

Capital in Bonds

10,000

Total Capital

11,775

The authors may be contacted at wonderlandconsultants@yahoo.com




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