Tax Talk

Can tax-free bonds of NHAI and HUDCO be purchased by an individual without limit and have the tax-free advantage. Or is there a limit on these holdings for tax-free status?

— Devidas

According to section 10 (15) (iv) (h) of I-T Act, 1961, interest payable on specified bonds issued by a public sector company and notified by Central Government in the Official Gazette, subject to such conditions specified in the notification, shall not be chargeable to Income tax.

Accordingly, the Central Government has notified specified bonds issued by NHAI and HUDCO as exempt from Income tax subject to certain condition notified therein. Further, there is no limit specified either by the I-T Act or Notification in respect of participation of individuals in the bonds issue. The notification has only specified an upper limit for aggregate amounts of bonds that can be issued by the issuer (i.e. NHAI and HUDCO) during a year.

Maximum or minimum limit, if any, may be specified by the respective issuer of the bond for different categories of investors and is subject to SEBI regulations. Hence, tax-free bonds can be purchased up to any limit except as specified by the issuer at the time of issue of bonds.

We sold our ancestral property in December 2011 and I got Rs 45 lakh as my share. I deposited this amount in the CGAS with SBI in June 2012. I want to purchase a plot in Chennai for Rs 55 lakh and construct a small house. Do I have to complete the construction by December 2014?

Is there any minimum area that has to be built on this plot to get tax exemption for total Rs 45 lakh?

My plot size is 60*40. Can I construct a small house of 300 sq ft?

— Giri Kanna

According to section 54 of the Income Tax Act, 1961, if an individual transfers a long-term capital asset (LTCA), being a residential house, the long term capital gains (LTCG) from the asset shall be exempt from tax if the individual has either invested in a new residential house within one year before or two years after the date of sale of the old residential house. Alternatively, the individual can construct a new house within three years from the date of sale. Any amount of capital gains which is not utilised for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited before furnishing such return.

As mentioned by you that it is an ancestral property, hence is a Long Term Capital Asset. The responses to your queries are as follows:

(a) Your understanding is correct. The construction of the new house needs to be completed within three years of sale of original asset i.e. by December 2014.

(b) No such condition of minimum area that needs to be built has been prescribed in the section for claiming the exemption. However, the new asset should be a residential house to be constructed / purchased within the prescribed time limit and held according to the deadlines mentioned.

(c) As mentioned earlier, there is no minimum area criterion for claiming the exemption. However, there may be rules prescribed by the municipality as to the proportion between plot size and built-up area. It is advisable to check with the local municipal corporation for the allowable percentage of construction in your case.

Mail your queries to taxtalk@thehindu.co.in

(The author is a practising chartered accountant)

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