Capital Gain Bonds (54EC Bonds) India
What are Capital Gain or 54EC Bonds?
Capital Gain or 54EC Bonds are financial instruments that entail tax exemption under Section 54EC. An individual can invest in such bonds on receiving capital gains from selling a property. These bonds are generally provided by government backed entities. Such entities are REC (Rural Electrification Corporation Ltd), PFC (Power Finance Corporation Ltd), NHAI (National Highways Authority of India) and IRFC (Indian Railways Finance Corporation Limited).
How Capital Gain Bonds help in Tax Exemption?
Following conditions need to be met to avail tax exemption under Section 54EC
- The investment amount should originate from Capital Gains arising out of property sale.
- Investment amount should not exceed Rs. 50 Lakh. In case real estate was owned by partners, then each partner can invest upto Rs. 50 Lakh.
- Investment in these bonds has to be made within 6 months of sale of property.
Such bonds can be redeemed only after 5 years from date of investment.
Key Features of Capital Gain Bonds
- Non transferable and non negotiable bonds
- No TDS but interest earned is taxed
- AAA credit rating by ICRA, CRISIL and India Ratings and Research Private Limited
- Maximum investment is Rs. 50 Lakh
- Maximum of 500 bonds can be bought at Rs. 10000 per bond
- Annual interest rate at 5%
- Tenure of the bond is 5 years
- Available in Physical as well as demat form
How is Investment in Capital Gains Bonds Better than Other Investments?
Let us look at this with an example. Lets say Ms. A & Ms. B both get Rs. 20,00,000 as taxable capital gain from sale of property.
Ms. A invests in Capital Gain Bonds at 5% and Ms. B invests same amount in other investment with return 10%.
Now, as the capital gain of Rs. 20,00,000 is exempt from tax, the post-tax amount for Ms. A will remain unchanged. In the case of Ms. B, payable tax amount is Rs. 4,00,000 bringing down taxable income to Rs. 16,00,000.
As Mr. A would receive 5% on Rs. 20,00,000, total income from that bond on maturity would be Rs. 25,00,000. Ms. B’s earning, on the other hand, would be calculated on 10% which would make total income on maturity Rs. 24,00,000. It can be seen that, the amount in case of Ms. B is less than that of Ms. A. Therefore, the rate of return and the maturity tenure play a pivotal role in deciding which investment avenue to opt for when reinvesting capital gains.
|Particulars||Capital Gain Bonds||Other Investment|
|Tax On Long Term Capital Gain||NIL||4,00,000|
|Post Tax Amount||20,00,000||16,00,000|
|Rate of Interest||5 %||10 %|
|Return Received on Maturity||5,00,000||8,00,000|
|Total Amount on Maturity||25,00,000||24,00,000|
Capital Gains Bonds are issued by the below Corporations:
|Bonds||Issue Details||Interest Rate||Rating||Tenure|
|Rural Electrification Corporation||On Going||5% p.a||AAA Rating||5 Years|
|National Highway Authority of India||On Going||5% p.a||AAA Rating||5 Years|
|Power Finance Corporation||On Going||5% p.a||AAA Rating||5 Years|
|Indian Railways Finance Corporation||On Going||5% p.a||AAA Rating||5 Years|
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