Section 54EC of the Income Tax Act, 1961 provides exemption from long-term capital gains tax provided an assessee invests within six months after the sale of his property in long-term "specified assets". The Finance Act 2007 limited such exemption to Rs 50 lakh in any financial year.

Some overzealous tax assessing officers seem to interpret this as a one-time exemption up to Rs 50 lakh only. Such an interpretation will prevent anyone taking advantage of a property sale, for example, in January 2008, facilitating an immediate Rs 50 lakh investment in January 2008 in "specified assets", and another Rs 50 lakh investment before the expiry of six months after sale in "specified assets".

It is evident from a strict interpretation of the law that the limitation of Rs 50 lakh is with reference to a particular financial year and not with reference to a particular sale transaction. Therefore, a taxpayer can legitimately make investments of Rs 50 lakh each in two consecutive financial years, provided the said investments are made within a period of six months after the date of transfer of the said capital asset.

Both the National Highway Authority of India (NHAI) and Rural Electrification Corporation Ltd (REC) have just released their new 54EC CGT exemption 5.75 per cent three-year bonds for the fiscal 2008-2009, allowing investors to invest up to Rs 50 lakh. These issues close on March 31, 2009.
Infrastructure investments

The Ministry of Finance has been proactive in developing a fiscal policy tailored to the development needs of the country by channelling long-term capital gains into infrastructure investments with appropriate tax incentives. Such measures have partially helped to arrest the growth of the underground economy. There is a strong incentive to undervalue property transactions, as a market value transaction is subject to LTCG tax at 20 per cent. The buyers encourage undervaluation, as they too escape the stamp duty of 9 per cent payable on registration.

The limitation of investments up to Rs 50 lakh seems to have been instituted to prevent the misuse of exemptions by corporations by artificially structuring transactions, which virtually seems to have eliminated the availability of such bonds for investors with legitimate long-term capital gains.

The MoF has a delicate balancing act to perform in achieving its somewhat competing and conflicting objectives. Such limits on investment run counter to official attempts to bridge the gap between the market value and registered value of properties. The MoF needs to consider increasing the limits on exemption, as and when it finds it appropriate to do so without jeopardising its revenue and developmental goals.