Capital Gain Bonds (54EC) Explained

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When an investor sells assets such as property or stocks, he is liable to pay capital gains tax on the profits you make. However, if he is looking to save on taxes, investing in capital gain bonds is a great option. In this blog, we will discuss capital gain bonds, their features, benefits, disadvantages, and how to invest in them.

What are capital gain bonds?

Capital gain bonds are a type of financial instrument that offers tax exemptions on capital gains. These bonds are issued by the government or government-approved entities such as the Rural Electrification Corporation (REC) and the National Highways Authority of India (NHAI). Capital gain bonds in India fall under Section 54EC of the Income Tax Act, of 1961.

Bonds eligible under section 54EC

To qualify for capital gain tax exemption, the bonds must meet the following criteria:

  • They must be issued by a government or government-approved entity.
  • The bonds must have a lock-in period of 5 years.
  • The maximum amount you can invest in these bonds is Rs. 50 lakhs in a financial year.
  • The bonds must be purchased within 6 months from the date of selling the asset.
  • The proceeds from the sale of the asset must be invested in the bonds, and the investor must hold the bonds for a minimum of 5 years to avail of the tax exemption.

Features of capital gain bonds

Here, we have discussed for you the characteristics of capital gain bonds:

  • Tenure: The lock-in period for capital gain bonds is 5 years. The bonds cannot be sold or transferred before the completion of the lock-in period.
  • Interest rate: The interest rate on these bonds is fixed and ranges from 5% to 6% per annum. The interest earned on these bonds is taxable.
  • Safety: Since capital gain bonds are issued by the government or government-approved entities, they are considered safe investments.
  • Nomination: The nomination facility is available for capital gain bonds, which means you can nominate someone to receive the benefits of the investment in case of your demise.

Benefits of capital gain bonds

Here are the benefits of parking your funds in capital gain bonds:

  • Tax exemption: One of the biggest benefits of investing in capital gain bonds is that they offer tax exemption on long-term capital gains. The maximum amount you can invest in these bonds is Rs. 50 lakhs in a financial year, and the investment amount is eligible for tax exemption.
  • Capital protection: Since capital gain bonds are issued by the government or government-approved entities, they are considered safe investments. The capital invested is protected, and the bonds offer a fixed rate of interest.
  • Low-risk investment: Capital gain bonds are low-risk investments as they are issued by government entities. Moreover, the investment is locked in for 5 years, which means there is no market risk involved.
  • Diversification: Investing in capital gain bonds helps in diversifying your portfolio. It is a great way to balance the risk in your portfolio.

Disadvantages of capital gain bonds

Here are the disadvantages of investing your money in capital gain bonds:

  • Low-interest rate: The interest rate on capital gain bonds is fixed and ranges from 5% to 6% per annum, which is lower than the market rate. However, the tax exemption on capital gains makes up for the lower interest rate.
  • Lock-in period: The lock-in period for capital gain bonds is 5 years, which means the investor cannot sell or transfer the bonds before the completion of the lock-in period. This reduces the liquidity of the investment.
  • Limited investment: The maximum amount you can invest in capital gain bonds is Rs. 50 lakhs in a financial year. This limits the amount of investment one can make in these bonds.

How to invest in capital gain bonds?

Investing in capital gain bonds is a simple process, and it can be done online or offline. Here’s how you can invest in capital gain bonds:

  • Choose the issuer: The first step is to choose the issuer of the capital gain bond in India. The government and government-approved entities such as NHAI and REC issue capital gain bonds. You can visit their websites to know more about the bonds they offer.
  • Check eligibility: Before investing in capital gain bonds, it is essential to check whether you are eligible for the investment. The maximum amount you can invest in these bonds is Rs. 50 lakhs in a financial year. You must also invest the proceeds from the sale of a long-term asset within 6 months to be eligible for tax exemption.
  • Fill out the application form: Once you have chosen the issuer and checked your eligibility, you can fill out the application form. The application form is available online or can be obtained from the issuer.
  • Submit the application form: After filling out the application form, you must submit it along with the necessary documents. The documents required may vary from issuer to issuer, but generally, you need to submit a copy of your PAN card, address proof, and identity proof.
  • Make the payment: After submitting the application form, you need to make the payment for the bonds. The payment can be made through a demand draft or online transfer. The payment must be made within the stipulated time frame mentioned in the application form.
  • Receive the bonds: Once the payment is made, you will receive the capital gain bonds. These bonds can be held in Demat or physical form.

Final Thought

In conclusion, investing in capital gain bonds can not only help individuals save on taxes but also provide a stable source of income through regular interest payments. However, it is important to carefully evaluate the risks and returns associated with these bonds before making any investment decisions. Additionally, individuals must ensure that they meet the eligibility criteria set by the issuing authorities before investing in these bonds.

Overall, capital gain bonds can be a valuable addition to an investor’s portfolio, particularly for those who have recently sold a property and are looking for tax-saving investment options. However, as with any investment, individuals must conduct thorough research and analysis before making any investment decisions.

Disclaimer: Investments in securities markets are subject to market risks, read all the related documents carefully before investing.

Frequently Asked Questions

1. What is the interest rate of 54EC capital gain bonds?

Answer Field

The interest rate of 54EC capital gain bonds is 5.25% per annum, payable annually. The interest income from these bonds is taxable under the heading “Income from other sources” and no tax deducted at source (TDS) is applicable.

2. Is it good to invest in 54EC bonds?

Answer Field

Investing in 54EC bonds can be a good option for those who want to save tax on long-term capital gains from the sale of land or building or both. However, there are some drawbacks of investing in 54EC bonds, such as:
The lock-in period of these bonds is five years, which means you cannot sell or transfer them before the expiry of this period. If you do so, the exemption claimed under section 54EC will be withdrawn and added to your income in the year of sale or transfer.
The maximum amount that can be invested in these bonds is Rs. 50 lakhs in a financial year and the subsequent financial year. This means that if your capital gains exceed this limit, you will have to pay tax on the excess amount.
The returns from these bonds are low compared to other investment options, such as mutual funds, stocks, or real estate. The interest rate of 5.25% is not very attractive, especially when inflation and tax are taken into account.
The liquidity and tradability of these bonds are poor, as they are not listed on any stock exchange and can only be redeemed after the lock-in period. You cannot use them as collateral for any loan or mortgage either.

3. What is the limit of capital gains exemption under 54EC?

Answer Field

The limit of capital gains exemption under section 54EC is Rs. 50 lakhs during the financial year in which the original asset (land or building or both) is transferred and in the subsequent financial year. This means that you can invest up to Rs. 50 lakhs in 54EC bonds within six months from the date of transfer of the original asset and claim exemption from tax on the capital gains. However, if your capital gains exceed Rs. 50 lakhs, you will have to pay tax on the excess amount.

4. Who is eligible for 54EC?

Answer Field

Any taxpayer, including individuals, Hindu Undivided Families (HUFs), companies, LLPs, firms, and others, who sells a long-term capital asset (land or building or both) and earns long-term capital gains from it, is eligible for claiming exemption under section 54EC by investing in 54EC bonds. However, the exemption is not available for short-term capital gains or long-term capital gains from other assets, such as shares, mutual funds, gold, or bonds.

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