Kapil Tiwari (export executive) 14 February 2014

54ec long term capital gains tax exemption in case of death

An individual, Mr.X, sold a plot of vacant land and in order to claim exemption of long term capital gains tax, invested Rs.50 lakhs in 54EC tax saving bonds of NHAI and REC. The bonds have a lock-in period of 3 years. Within 3 years, the bonds cannot be transferred or converted or sold in order to claim the tax exemption.

Now, if Mr.X expires within one year of investing in the 3-year bonds, will the tax exemption still be available, provided the bonds are not transferred or converted or sold? Should the bonds continue to remain in the name of Mr.X for additional 2 years (even after death) to complete the 3-year lock-in period? Is this legally allowed?

Or, do the bonds have to be transferred/transmitted to the nominee of Mr.X (after his death) and the nominee does not transfer/convert/sell the bonds until the 3-year lock-in period is complete?

The worry is that transfer/transmission of the 3-year 54EC bonds to the nominee within one year may amount to not holding the bonds for the compulsory 3 years and hence capital gains tax will have to be paid.

Kindly advise what is the best course of action. Thanks.

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4 Replies

Advocate Ravinder (Advocate/Attorney) 15 February 2014

Even after the death of X, the bond will continue in the name of legal heirs of X and it will be handed over to the nominee after the lock in period of 3 years. But if the nominee wants to take back the bond immediately after the death of X, the tax exemption will not be available to the legal heirs of X. As soon as the nominee takes backs the bond, the legal heirs are entitled to claim their respective shares in the bond.

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Kapil Tiwari (export executive) 16 February 2014

Dear Ravinder:

(1) Should the bonds continue to remain in the name of the original holder, for the entire 3 years lock-in period (even after death)?

(2) Or, should the bonds be transmitted to the nominee and the nominee should continue to hold the bonds for the entire 3 years lock-in period?

(3) Or, should the bonds be transmitted to the legal heirs and the legal heirs should continue to hold the bonds for the entire 3 years lock-in period?

Which of the above three options is better and legally correct? Thanks.

Advocate Ravinder (Advocate/Attorney) 16 February 2014

Normally, when the holder of bond dies, the department will inform the nominee to take possession and it will not be transferred in the name of nominee. He is the only caretaker of the custody of the bond on behalf of his legal heirs. He has to inform the same to the legal heirs. If there is no nominee clause, the bond will be kept in the custody of the department till the original legal heirs claims the same with the permission of the court. Till then the bond stands in the name of deceased person only. I have already explained you that if the nominee or the legal heirs wants to cancel the bond within three years, there will not be exemption of tax. If you cancel the bond after three years, the legal heirs will get full tax exemptions.

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Kapil Tiwari (export executive) 17 February 2014

Thank you very much, Ravinder Sir! There is nomination done for the bonds. So the steps to be followed are:

1) On death of original bond-holder, the nominee will inform the company (NHAI and REC) and takes possession of the bonds as a caretaker. However, the bonds will continue to remain in the name of the original bond-holder (not the nominee).

2) Second step is that the nominee will inform the legal heirs to take possession of the bonds.

3) The legal heirs will follow an established legal procedure and the bonds will be transmitted in the names of the legal heirs.

4) The legal heirs will not cancel/sell the bonds until the lock-in period of 3 years is complete. Therefore, full tax exemptions will be available.

Dear Ravinder Sir, have I understood all the steps correctly now? Many thanks.