India presents a vast potential from local investment as well as the overseas. No companies, of any size, aspiring to be a global player can, for long ignore this country, which is expected to become one of the top three emerging economies. The economy is booming but in particular the growth rate is significant in the real estate, especially in Mumbai.

One can imagine having sale proceeds from real estate, which is long term (three years of holding period) and lying idle, in the savings bank account or current account till we decide what to do with the money which generates 3.5 per cent per annum or nil interest respectively in which account it is held.

We could invest the same in liquid funds of mutual funds with a daily dividend option, which would give tax-free returns of around 5 to 5.5 per cent per annum in the hands of the investors

Tax-saving on the sale of the estate is what everyone has to decide. There are a few options to decide:

• Invest in new house;
• Invest in 54 EC Bonds;
• Pay capital gains tax.

We shall highlight a few basic concepts:

Any asset purchased or sold invites capital gains. For an individual or company, capital asset means properties of any kind held by a person whether or not connected with his business or profession.

Capital assets are classified as long term or short term with reference to the period of holding of the assets till it is transferred. The classification is made on the following basis.

Capital gain is computed taking into consideration the cost of improvement. In case of long term capital gains benefit, indexation cost can be taken. The central government notifies the cost inflation index for every year.

Now highlight a few views on the Section 54 EC of the above in particular: Sec 54EC grants deduction from taxable capital gains on transfer of a capital asset to the extent of investments in notified bonds within six months from the date of transfer of such asset.

Long-term capital asset transferred between January 1, 2006, and June 30, 2006, can invest in these bonds till December 31, 2006. In other words, the time available for those, who had transferred the capital asset on January 1, 2006, will be December 31, 2006, same as for those transferring on June 30, 2006.

Both extensions are therefore even more liberal than what is strictly warranted by the delay in issue of notifications by the government.

But then, there is a risk of the bonds not being available after some time, if taxpayers delay their investments.

This is because the notification for the National Highways Authority of India limits the issue to Rs 1,500 crore, while for bonds issued by the Rural Electrification Corporation; the limit is Rs 4,500 crore.

Here lies the break. . .

The collections made by them cross a certain limits, this relief will not then be available. It is for this reason that the application from the Rural Electrification Corporation clearly provides that these bonds issued on a private placement basis have a ceiling of Rs 4,500 crore (Rs 45 billion) during 2006-07, so that excess subscriptions will not be accepted. Excess subscriptions received will be returned with interest at 5.5 per cent.

What can a taxpayer do?

If a taxpayer merely deposits the amounts through banks or any of the branches and it is later found that the limit has been exceeded, he will be losing the benefit of this deduction under Sec 54EC.

Obviously, the available bonds will be issued on a first-come-first-served basis.

The notifications cover only bonds issued during 2006-07, so that those who have capital gains after October 1 will have to make sure that they subscribe to the bonds, if they are still available even before the expiry of six months.

Lets us now take a case study to understand the concept of 54 EC One sells any capital asset (like a house property), a capital gains tax liability can arise on the same.

This asset is held for a period of more than 36 months, a long-term capital gain arises.

Now as per the above case study, Options available are both extensions are therefore even more liberal than what is strictly warranted by the delay in issue of notifications by the government.

The author is head of financial planning division at Sykes & Ray Equities.