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Capital Gain Tax Exemption Bonds – Safeguard Your Long Term Capital Gains Under Section 54EC

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In todays economical condition, people find real estate as safe and profit generating investment. Buying a residential property, earning rent from the property for few years and then selling the same at higher price to generate good profit. Isn’t it sounds attractive to you?

The next question comes to our mind is, is there any tax on the income generated from the sale of property? Here comes the concept of capital gain tax – it is a form of tax levied by the government on profit from the sale of capital asset like property, stocks, bonds etc.

When we say government levy tax on the gain from the sale of capital asset then the next thing comes is – is there any ways to save this tax? To save tax from long term capital gain (LTCG) – you can either invest the profit again in another residential property (section 54F) within 1 year or buy capital gain bonds (section 54EC) within 6 months from the date of transfer of asset.

capital gain tax bonds

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Capital Gain Bonds

As per the income tax act 1961 section 54EC, capital gain bond offers tax exemption to investors who invest their long term capital gain for the purchase of capital gain bonds within a stipulated time period from the date of transfer of capital asset.

Here for an example, Rohit sold a property where he made a capital gain of Rs 500,000. Now the tax liability @ rate of 20% will come to Rs 100,000. To save tax liability of Rs 1 lakhs, Rohit can invest the amount of capital gain realized from sale of property into Capital gain bonds. With this Rohit will not be liable to pay tax on his capital gain amount i.e Rs 1 lakhs.

Companies Offering Capital Gain Bonds In Indian Market Under Section 54EC:

  • RECL (Rural Electrification Corporation Ltd)
  • NHAI (National Highways Authority Of India)

Features Of The Different Types Of Capital Gain Bonds Available In Indian Market Under Section 54EC

POINT OF DIFFERENCE

RECL

NHAI

Coupon/Interest rate/Yield 6.00% 6.25%
Tax Status Taxable Taxable
Minimum Rs 10,000 Rs 10,000
Maximum Rs 50 Lacks 50 Lacks
Maturity Period 3 Years 3 Years
Mode Of Interest Annual Annual
Credit Rating AAA AAA

 

Provisions Of Section 54EC Of Income Tax Act 1961
  • Exemption under section 54EC  can be claimed on long term capital gains only (held for 3 years for more before sale).
  • Only capital gain amount can be invested in capital gain bond not the net amount received on sale of property.
  • Deduction can be availed only on the amount (Part or full) of capital gain invested by the assesse.
  • Long term capital gain needs to be invested into the bonds of either RCEL Or NHAI companies.
  • Capital gain amount needs to be invested within 6 months from the date of capital gain arises.
  • The minimum and the maximum limit of the investment amount is Rs 10,000 and 50 lakhs respectively.
  • The lock-in period of capital gain bonds is 3 years, which means once invested you will not be allowed to sale your investment before 3 years from the date of purchase.
  • Capital gain bonds do not offer its investors the facility of taking loan on these bonds.
  • The interest rate on capital gain bonds is 6% per annum.
  • If the amount invested in bonds is less than the capital gains realized, only proportionate capital gains would be exempt from tax.
  • Assesse can hold bonds either in dematerialized form or in physical form.
  • The bonds can be held in single or joint names.
  • Nomination facility is available on capital gain bonds.
  • These bonds can be transmitted  to the legal heirs in case of death of the bondholder.
Benefits Of Investing Long Term Capital Gain Into Capital Gain Bonds
  • Save tax on the long term capital gain realized with the transfer of capital asset.
  • Generate income on the investment made with the purchase of capital gain bonds
  • Capital gain bonds are quite secured as compare to other market instruments.
  • 50 lakh limit for investment under capital gain bond is for each financial year. So if your six month limit falls in two different financial years then you can save upto 1 crore by investing 50 lakhs in each financial year under section 54EC.
  • Investor is not required to have a demat account to invest in capital gain bonds.
Drawbacks Of Investing Capital Gain Into Capital Gain Bonds
  • The rate of interest on capital gain bonds is 6% which is very low as compare to other investment options available in the market such as Public Provident Fund (PPF), Bank Fixed Deposits (FDs), National Saving Certificates (NSC) etc.
  • The lock-in period is 3 years
  • Interest on capital bonds is taxable under the head ‘Income earned from other sources’.
  • Investment under capital gain bonds offers exemption for only long term capital gains.
  • The maximum amount of capital gain amount investment under capital bond is restricted to Rs 50 lakhs.
  • Capital gain investment needs to be made within 6 months to avail tax exemption under section 54EC else no such benefit will be available.
  • Capital gain bonds are non-transferable, non-negotiable and are not allowed to be offered as security for any loan or advance.
Conclusion:-

Capital gain bonds are one of the best investment you can make to save your tax on capital gain and to keep your investment safe with reasonable amount of return on the same.

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