54EC Capital Gains Bonds: Meaning, Features and Benefits
Whenever you indulge in the sale of any asset, you will receive capital gains. These capital gains come under either short-term capital gains or long-term capital gains, depending on the holding period of such assets.
These gains are subject to taxation according to the provisions of the Income Tax Act 1961. However, the government provides opportunities to claim tax exemptions. In this regard, you can reinvest your capital gains in Section 54EC bonds, also known as capital gains bonds, to claim tax benefits.
In this article, we will discuss various dimensions of these bonds and how they can help you in reducing your tax liabilities.
What Are Section 54EC Bonds?
As the name goes by, these bonds are issued under Section 54EC of the Income Tax Act 1961. Only bonds issued by the National Highway Authority of India, Rural Electrification Limited, and Power Finance Corporation Limited are eligible to fall under this category.
These are beneficial for those investors who have accumulated significant long-term capital gains arising from the transfer of a long-term capital asset being land or building or both and are looking for some relief on the taxation front. This bond is not available for investment of short-term capital gains proceeds.
We hope that you are well versed with the meaning of 54EC bonds; let’s shift our focus to other dimensions.
What Are the Features of Section 54EC Bonds?
The features of Section 54EC bonds are as follows:
- These bonds offer a decent rate of interest to their investors. Issuers pay this interest component on an annual basis. Moreover, interest receivable by investors shall be subject to taxation.
- The probability of default of these bonds is quite low. These bonds have the highest credit rating, and since these bonds are issued by PSUs, they are backed by a sovereign guarantee.
- These bonds are ideal for a medium-term investment horizon. It comes with a maturity of 5 years which also serves as a lock-in period.
- These bonds are non-transferable in nature. It means you cannot transfer these bonds to someone else.
- The minimum investment amount in these bonds is ₹ 10,000.
What Are the Benefits of Section 54EC Bonds?
Various benefits of 54EC bonds, also known as capital gains bonds, are as follows:
- Tax Exemption
The biggest plus point of these bonds is that they provide an option of tax exemption. The amount available for tax benefits is the capital gains amount or investment made in 54 EC bonds, whichever is less.
- Stable Income
These bonds also provide a stable and assured income. The rate of interest on these bonds stands at 5.75%. Apart from reducing your gross tax liability, these bonds also provide you with a regular income in the form of interest.
It is quite easy to store and access these bonds. The respective public sector enterprises issue these bonds from time to time, and you can subscribe to the same via online or offline mode. Moreover, you can store these instruments either in a Demat account or in the physical format.
- Low Risk of Default
As companies owned by the Government of India are responsible for issuing such bonds, it comes with a sovereign guarantee. Therefore, the risk of default with these bonds is quite low, and your investment is safe and secured.
Points to Note for Availing LTCG Exemption
Here are the various conditions that you should keep in mind to take advantage of requisite tax benefits:
- In order to receive tax related benefits, you have to make an investment in these bonds within 6 months of accruing the capital gains.
- You can redeem 54EC bonds only after the completion of the maturity period, i.e., after 5 years.
- It is important to note that only long-term capital gains arising from from the transfer of a long-term capital asset being land or building or both, are eligible for exemptions in case of subsequent reinvestment.
- The maximum limit of exemption is ₹ 50 lakh.
How to Buy 54 EC Bonds?
You can purchase this bond by following the given steps:
Step 1: Visit the official portal of the companies issuing these bonds, and download the form from there.
Step 2: Take a printout of the forms and fill up all the details.
Step 3: After filling out the application form, you will have to submit this form at a designated bank branch. Along with this form, you will need to attach a demand draft or payee cheque for the requisite amount. It is necessary to mention the DD or cheque number on the application form.
Step 4: Apart from this, you can also go for an electronic fund transfer and upload the form online along with necessary documents.
After completing all the above-mentioned formalities, your investment in these bonds would be complete.
54 EC bonds are one of the most popular measures to save tax accrued on long-term capital gains. However, it is important that you invest in these bonds within the stipulated time frame to avail the tax benefits.
Frequently Asked Questions
Who can issue 54 EC bonds?
As per relevant provisions of the Income Tax Act 1961, the Rural Electrification Corporation, Power Finance Corporation, National Highway Authority of India and Indian Railway Finance Corporation can issue these bonds.
What is the maximum investment amount of these bonds?
The maximum investment amount related to these bonds is ₹ 50 lakh in every financial year. Moreover, in terms of the number, you can purchase a maximum of 500 bonds.
Do 54 EC bonds come with a lock-in period?
Yes, these capital gains bonds come with a lock-in period. You are not allowed to prematurely withdraw from these bonds before their expiry date.
What happens if a 54 EC bondholder dies?
In case of the untimely death of a bondholder, the issuing entity shall recognise the administrator of the deceased. The company will consider their legal heir and transfer those bonds in the legal heir’s name.