Section 54EC of Income-tax Act, 1961 (I-T Act) provides for exemption of long-term capital gains arising from the transfer of a long-term capital asset (being land, building or both), provided the amount of such gains is invested in certain specified bonds within 6 months after the date of such transfer.
These bonds are financial instruments that are issued by certain government entities or organizations for the purpose of providing a tax-saving investment option to investors. These bonds are specifically designed to offer tax exemptions on long-term capital gains made by investors.
Features of 54EC Bond of the I-T Act
- Maximum investment that can be made in these bonds is ₹ 50 lakh in a financial year.
- The bond must be held for a period of 5 years from the date of acquisition (if the bond is issued on or after 1st April 2018), and if the assessee fails to do so the capital gain exemption will be revoked
- One cannot claim deduction under section 80C of the I-T Act for the investment made under section 54EC of the I-T Act.
- the amount of capital gains up to the amount invested in the specified bonds is exempt from tax.
- A key advantage of investing in capital gain bonds is that they are considered relatively safe investments since they are issued by government entities.
- By investing in capital gain bonds one can save tax on capital gains and can reduce their capital gains tax liability and, at the same time, earn a fixed rate of interest.
Bonds eligible for exemption under section 54EC of I-T Act
In India, bonds are issued by the following organizations are exempt from capital gains under I-T Act:
- Rural Electrification Corporation (REC) ,
- National Highways Authority of India (NHAI),
- Power Finance Corporation (PFC), and
- Indian Railway Finance Corporation Limited (IRFC)
Tax Benefits of Capital Gain bonds
- Exemption from Long-Term Capital Gains Tax: One of the primary tax benefits of 54EC Bonds is that they provide an exemption from long-term capital gains tax. If an investor invests the capital gains from the sale of a long-term asset in 54EC Bonds, they can claim a tax exemption on the gains up to a maximum of Rs. 50 lakhs in a financial year. Proper spacing required.
- High-Interest Rates: 54EC Bonds offer attractive interest rates, which are usually higher than those offered by other fixed-income investment options. Currently, the interest rate offered by 54EC Bonds is approximately 5% on an average.
- No Tax Deduction at Source (TDS): The interest earned on 54EC Bonds is not subject to TDS, which means that investors receive the full interest payment without any deduction of tax.
- No Reinvestment of Capital Gains Required: Unlike other tax-saving options such as Section 54F, which require reinvestment of capital gains in a new property or asset, there is no such requirement for 54EC Bonds. Investors can simply invest their capital gains in these bonds and avail of the tax benefits.
Eligibility and Investment Criteria
- Investor Type: Only individuals and Hindu Undivided Families (HUFs) are eligible to invest in 54EC Bonds. Other entities such as corporates, partnership firms, and trusts are not eligible.
- Source of Funds: To invest in 54EC Bonds, the funds used must come from long-term capital gains arising from the sale of any asset such as land, building, or shares.
- Timeframe for Investment: The investment in 54EC Bonds must be made within six months from the date of sale of the asset, which generated the capital gains. If the investment is not made within this timeframe, the investor will not be eligible for the tax benefits provided by the bonds.
- Investment Limit: The maximum investment allowed in 54EC Bonds by an individual or HUF is Rs. 50 lakhs in a financial year. However, there is no limit on the number of times an investor can invest in these bonds.
- Mode of Investment: Investors can invest in 54EC Bonds either in physical or demat form, depending on their preference.
Step by Step guide to making the Investment
- Determine Your Eligibility: To invest in 54EC Bonds, you need to be an individual or a Hindu Undivided Family (HUF). Additionally, the investment must be made within six months of selling an asset that generated long-term capital gains.
- Choose the Issuer: Out of the four bonds available in India, choose the most suitable bond for you that best meets your needs.
- Check Availability: Once you have decided on the issuer, check if the bonds are currently available for investment. You can check this on the issuer’s website or through a financial advisor.
- Determine Investment Amount: The maximum amount that can be invested in 54EC Bonds by an individual or HUF is Rs. 50 lakhs in a financial year. Determine how much you want to invest based on your financial goals.
- Fill out the Application Form: If investing through a physical form, fill out the application form provided by the issuer.
- The application form will require you to provide your basic personal details, including your name, address, PAN, and bank details. You will also need to specify the amount you want to invest.
- Submit Required Documents: Along with the application form, you will need to submit certain documents, such as a copy of your PAN card, address proof, and a cancelled cheque or bank statement.
- Make Payment: If investing in physical form, make the payment only through a demand draft or an account payee cheque. If investing in the demat form, make the payment electronically by way of NEFT/RTGS through your broker or depository participant and mention the UTR number in the form.
- Receive Confirmation: Once your investment is accepted, you will receive a confirmation from the issuer. This confirmation will include details such as the bond certificate number, investment amount, and date of investment.
- Hold Bond Certificate: If investing in physical form, you will receive a bond certificate from the issuer. Hold the certificate carefully as you will need to produce it at the time of maturity.
- Track Your Investment: Keep track of your investment and the maturity date to ensure that you receive the full benefits of the investment.
Investors must carefully consider their investment goals and risk appetite before investing in capital gains bonds. These bonds are a good investment option for individuals with long-term investment goals who want to save taxes on their capital gains.
In conclusion, capital gains bonds are a tax-efficient investment option that can help investors optimize their returns on long-term capital gains. However, investors must weigh the benefits and drawbacks of investing in these bonds and carefully consider their investment strategy before making any investment decisions.
Frequently Asked Questions (FAQ)
Can an investor use capital gains bonds to save taxes on short-term capital gains?
No, capital gains bonds are only eligible for tax exemption on long-term capital gains. Short-term capital gains cannot be used to avail of the tax benefits of these bonds.
Are there any risks associated with investing in 54EC bonds?
As with any investment, there are certain risks associated with investing in 54EC bonds. These include the risk of default by the issuing authority, changes in interest rates, and changes in government policies that may affect the tax benefits offered by these bonds. It is important to conduct thorough research and consult with a financial advisor before investing in any financial instrument.
Is there a limit to the number of 54EC bonds that can be purchased by an individual?
No, there is no limit to the number of 54EC bonds that can be purchased by an individual. However, as mentioned above, the maximum amount that can be invested in these bonds is Rs. 50 lakhs per financial year.
Can NRIs invest in 54EC bonds?
Yes, NRIs (Non-Resident Indians) can invest in 54EC bonds. However, they will not be eligible for the exemption offered in section 54EC.