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CMA Intermediate · Direct and Indirect Taxation · Capital Gains

Mr. Dinesh Shah invested Rs 50,00,000 of long-term capital gains from a land sale in eligible NHAI bonds on 1 September 2026, and the gains were exempt under Section 85. On 1 March 2028 he took a loan of Rs 30,00,000 against the security of these bonds. What is the consequence?

Rs 50,00,000 becomes chargeable as long-term capital gains in the tax year of the loan. A loan on the security of the bonds is deemed conversion into money, and as it occurs within five years of acquisition, the entire exempted gain is withdrawn, not merely the loan amount.

  1. ANothing, because only an outright sale triggers withdrawal of exemption
  2. BRs 30,00,000 is chargeable as long-term capital gains in the tax year of the loan
  3. CRs 50,00,000 is chargeable as long-term capital gains in the tax year of the loanCorrect
  4. DRs 50,00,000 is chargeable only when the bonds mature

Explanation

Section 85(4) deems a loan or advance on the security of the new asset to be a conversion into money on the date of the loan. Since this is within five years of acquisition, Section 85(3) makes the whole exempted gain of Rs 50,00,000 chargeable as long-term capital gains in that tax year, not just the loan amount.

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