New Delhi, March 30: The government today clarified that investments made only in specially notified bonds of the Rural Electrification Corporation Limited (REC) and National Highways Authority of India (NHAI) will be exempt from long-term capital gains tax.

Earlier, bonds issued by Nabard, National Housing Bank (NHB) and Sidbi enjoyed the exemption.

Under the provisions of section 54EC of the income tax act, long-term capital gains were exempt from tax if such gains were invested in bonds issued by the National Bank for Agriculture and Rural Development (Nabard), REC, National Housing Bank, Small Industries Development Bank of India (Sidbi) or NHAI.

The Finance Bill, 2006 has amended the provisions of the section to restrict such investments on or after April 1 to the bonds issued by REC and NHAI.

Earlier, any bonds issued by Nabard, NHB, REC, NHAI, or Sidbi redeemable after three years were treated as ‘long-term specified assets’ and granted capitals gains tax exemptions.

These agencies issue bonds to raise funds, which are then used to finance various projects.

For instance, bonds issued by NHAI raise money to fund the National Highway Development Programme (NHDP), while those of REC are used to finance rural electrification initiatives.

Nabard, Sidbi and National Housing Bank are primarily refinance agencies ? institutions that lend to commercial banks and other financial institutions, which in turn lend it to the final borrower.

REC and NHAI, however, often directly finance power and road projects, respectively.

Clause 13 of the Finance Bill, 2006 has now restricted the long-term tax exemption benefits only to bonds issued by REC and NHAI.