What are Capital Gain Bonds?
Capital Gain Bonds are also known as 54EC bonds which allow an assessee/investor to save income tax on long-term capital gain by investing the gains.
The investment into these bonds has to be made within 6 months from the date of long-term capital gain. They have a fixed lock-in period of 5 years and can be either held in Physical or Demat form.
They are issued by various institutions managed by the Government of India to finance specific capital projects. They are called 54EC bonds because the taxability benefits of these bonds are mentioned under section 54EC of the Income Tax Act, 1961.
Who are the authorities issuing 54EC bonds?
1. National Highway Authority of India (NHAI)
2. Rural Electrification Corporation (REC.)
3. Indian Railways Finance Corporation Limited (IRFC)
4. Power Finance Corporation (PFC)
Facts to be considered to claim tax exemption:
1. One should have a long-term capital gain from the sale of any capital asset
2. The investment must be made within 6 months from the date of sale of such a capital asset.
3. The investment can be redeemed only after 5 years.
4. The face value of each bond is Rs 10,000 and the investor can invest in a maximum of up to 500 bonds thereby claiming the exemption of up to Rs. 50 lacs. The maximum amot that can be invested in a financial year is capped at Rs. 50 lakhs.
5. The 54EC bonds cannot be transferred from one person to another at any point in time.
- Features of Capital Gain Bonds
- Fixed Returns:
The Government of India guarantees the annual income from interest earned, and the investors get the guaranteed returns. So, the investors who buy the bonds do not have to worry about the return on their investments. The interest rate is between 5%-6% p.a. However, the interest may change depending on the economy and interest rate scenario in the country.
- Low-risk profile:
The bonds have lower risk as they are backed by public sector enterprises and the default rate is too low. Also, the government is reliable and has the power to collect taxes and repay the money acquired through issuing bonds. So, they are generally rated AAA which guarantees the investors that their money is secure.
- Lock-In period:
The capital gain bonds are issued with the aim of financing capital projects which are long term, so the bonds come with a lock-in period. Investors are required to lock their money for five years by investing in bonds. So, there is no liquidity.
Let’s take an example to understand how one can save tax by investing in 54EC bonds.
On 25th June 2020, Mr. A purchased a house property for ₹ 1,00,00,000 (For simplicity, let’s assume this is the cost with indexation). He made certain changes to the property and its interior by spending ₹. 15,00,000 in the month of October 2021. The property was sold on 30th June 2022 for ₹. 1,80,00,000 through a broker and brokerage charges, of ₹ 2,00,000 was paid by Mr. A. In this case, the Long-Term Capital Gain will be computed as below:
|Less – Expenses incurred in connection with the transfer||(2,00,000)|
|Net Sale consideration||1,78,00,000|
|Less – Indexed Cost of Acquisition||(1,00,00,000)|
|Less – Cost of Improvement||(15,00,000)|
|Long term Capital Gain||63,00,000|
Continuing with the above example, let’s take two options for investing this long-term capital gain of Rs. 63,00,000.
|Particulars||Opt1 – Invest in Capital Gain Bond as per Sec 54EC||Opt2 – Invest in other securities, without tax benefits, giving 10%p.a|
|Long-term Capital Gain||63,00,000||63,00,000|
|Amount to be invested||50,00,000(Sec 54EC threshold)||50,00,000(Considering same investment amt for comparison)|
|Tax on above income (Calculation as per old tax regime, for income above 50 lacs, surcharge levied @ 10%)||2,02,500 (1,12,500 + (30% on 3,00,000))||18,72,750 (1,12,500 + (30% on 53,00,000))*1.10|
|Post Tax Amount||60,97,500 (63,00,000-2,02,500)||44,27,250 (63,00,000-18,72,750)|
|Rate of Return||6%||10%|
|Return received after 5 years||16,91,000||30,53,000|
|The total amount on maturity||77,88,500 (60,97,500+16,91,000)||74,80,250 (44,27,250+30,53,000)|
As the maturity amount in Option 1 is higher, investing the Long-Term Capital Gain into Capital Gain Bonds as per the provisions of Sec 54EC seems to be beneficial for the Assessee/ Taxpayer.
Procedure to Invest in the 54EC bonds:
Investors can invest in the capital gain bonds either through a broker or by buying online on their own. One can decide upon which bond to invest in by enquiring about it online.
The Investor can buy the bond by visiting the website online. Below are the steps to invest:
Step 1 – Login to the official website of the institution offering the bond.
For example to invest in NHAI bonds visit the official NHAI bonds website.
Step 2 – Refer to the capital gain bond instructions available on the website and fill in the application form.
Step 3 – Agree to the terms and conditions of the bonds.
Step 4 – Option will be given to the Investor. Option A: Hold bonds in Physical Mode. Option B: Hold bonds in Demat form. Fill in the relevant details accordingly and click on submit.
Step 5 – Investors who opt for the Demat form should select depository NSDL/CDSL and fill in the required Demat account details.
Investors who opt for the Physical mode need to download the form available on the website, fill it and submit the signed form by visiting the application form submission centers. The address of these centers is available on the website.
Step 6 – After applying, the system generates a form that needs to be downloaded. The form needs to be printed and signed.
Step 7 – Upload the form by clicking the ‘Upload Application’ option.
Step 8 – It will ask for OTP verification (For both email and mobile phone)
Step 9 – Once OTP verification is done, make the online payment through payment modes available on the website and purchase the bond.
Capital gain bonds provide lower returns, have a lock-in period and thereby carry a liquidity risk. Investing in Capital gain bonds is beneficial for investors who have earned long-term capital gains (LTCG) and want to save upon the tax payable on LTCG.
Frequently Asked Questions
Can I invest in multiple bonds to claim the tax benefit?
Yes. One can invest in multiple bonds where the tax benefit will be given for investment in all the capital gain bonds put together with the overall threshold of 50 lacs.
Can I avail of the benefit under Section 54EC on any of my capital gains?
Yes, the benefit is available if the investor has a long-term capital gain on the sale of any capital asset.
Can I redeem the investment in bonds before its maturity?
Yes, the investor can redeem his investment from capital gain bonds at any time. However, if the same is withdrawn before the end of the lock-in period, the tax benefit claimed by him on such investment will stand to be withdrawn.
Is interest earned on Capital Gain Bonds taxable?
Yes, Interest will be considered as “income from other sources” and will be taxed according to the normal tax rate applicable to the assessee.