Capital gain bonds, also referred to as 54EC capital gain bonds, serve as a financial instrument specifically tailored to offer tax benefits to individuals and companies who have generated long-term capital gains. These bonds provide a distinctive investment avenue through which individuals and companies can strategically reduce their tax burdens by reinvesting their long-term capital gains in these bonds.
Every year, you become aggressive with your tax planning. You might be attempting to maximise Section 80C benefit by investing in multiple schemes covered by it. What if you sold your real estate asset for profit? You must contemplate long-term capital gain bonds.
What are Capital Gain Bonds?
A Capital gain bond is another common type of debt instrument that is issued by government-backed infrastructure entities. Like any other bond, the issuer is the borrower who pays specific interest to the lender, who are investors. However, the primary function of this bond is to provide investors with tax benefits under Section 54EC (deals with long-term capital gains) by allowing them to invest proceeds from the sale of long-term capital assets.
54EC Capital gain bonds have been named so because of the tax benefits available in this specific section.
Capital Bonds that are eligible for 54EC benefits–
- Rural Electrification Corporation Limited (REC) bonds
- National Highway Authority of India (NHAI) bonds
- Power Finance Corporation Limited (PFEC) bonds
- Indian Railway Finance Corporation Limited (IRFC) bonds.
- Any other central government’s notified bonds.
Capital Gain Bond Interest Rate
The interest rate associated with capital gain bonds significantly determines potential returns and attractiveness as an investment option. With effect from 1st April 2023, Capital Gain Bond Interest Rate has been increased from 5% to 5.25%.
While there are multiple types of bonds in India, it’s essential to be aware of certain key factors when considering capital gain bonds.
- Firstly, these bonds come with a lock-in period of 5 years, meaning investors cannot redeem them before this period concludes.
- Additionally, the interest earned on these bonds is distributed annually and is subject to taxation based on the individual’s income tax slab.
These considerations should be assessed when evaluating the suitability of capital gain bonds for one’s investment strategy.
Pros of Capital Gain Bonds
- Capital security: Bonds have ratings assigned to them by credit rating agencies. The scale runs from ‘AAA’ to ‘D.’ Capital gain bonds typically have an AAA rating, indicating that the risk of the issuer defaulting on principal and interest payments is low. As a result, investing in such bonds ensures that your capital is secure.
- Assured capital gain bonds interest: Capital Gain Bonds are classified as fixed-income instruments because their returns do not fluctuate in response to market conditions. They offer 5% assured interest, slightly less than what these bonds previously provided. Also, including capital gain bonds in your holdings can help to reduce the overall risk associated with your portfolio and enjoy tax benefits.
Saves you tax: When you sell your property after three years, the gains are subject to a 20.6% long-term capital gain tax (including cess). Reinvesting the entire profit in capital gain bonds allows you to save the tax.
Cons of Capital Gain Bonds
- Liquidity issue: Capital gain bonds should be your last resort if you have short-term objectives. The reason is that they have a five-year lock-in period, and you can redeem them beforehand.
- Transferability issues: These bonds are not listed on any Indian exchange. If you enjoy buying and selling bonds on an online trading platform to benefit from the secondary market, capital gain bonds are not for you, and you should look for other debt instruments.
- Limited options: In India, capital gain bonds are scarce. However, your options broaden regarding other debt instruments tradable on the stock exchange app. You can choose one with enticing interest rates and government backing.
Long Term Capital Gain Bonds
Long-term capital gain bonds, often referred to as 54EC bonds, have a maturity period exceeding one year. These bonds, backed by the government or its agencies, serve as a means to fund long-term projects and development activities. Importantly, they offer tax exemption under Section 54EC of the Income Tax Act, 1961, when investors reinvest their long-term capital gains within six months of the asset’s transfer.
Types of Bonds in India
India’s bond market offers a diverse range of options categorized by issuers, coupon rates, and tenures. Bond types include government securities (G-Secs), state development loans (SDLs), state-guaranteed bonds, public sector undertakings (PSUs) bonds, corporate bonds, and bank bonds. Coupon rates classify bonds into fixed, floating, zero coupon, and inflation-linked categories, while tenures span short-term, medium-term, and long-term options.
54EC Capital Gain Bonds
54EC capital gain bonds qualify for tax exemption under Section 54EC of the Income Tax Act, 1961. Issued by entities like NHAI, REC, PFC, and IRFC, these bonds enable investors to shield their long-term capital gains from land or building sales. The maximum investment limit for these bonds stands at Rs. 50 lakhs per financial year across all issuers.
54EC Bond Investment Limit
Investors are subject to a maximum investment limit of Rs. 50 lakhs per financial year across all issuers. This limit applies to both individuals and Hindu Undivided Family (HUF) taxpayers. Investing beyond this threshold results in only a proportionate amount of capital gains becoming exempt under Section 54EC.
Capital Gain Bond Lock-In Period
To enjoy tax benefits, investors must adhere to a lock-in period of five years from the bond’s allotment date. Prematurely selling, transferring, or converting these bonds into cash within this timeframe will lead to the withdrawal of tax exemptions, and the original capital gains will become taxable in the year of sale.
How do Capital Gain Bonds provide tax advantages?
You must meet the following provisions to get tax benefits from 54EC bonds.
- You must invest the proceeds within six months of selling the immovable assets (land or building).
- The exemption benefit is only available if the proceeds from the immovable property are classified as long-term capital gains.
- If you sold the asset within three years of purchasing it, the investment made from such proceeds does not qualify for tax benefits.
- The investment amount from the property proceeds must not exceed Rs 50,00,000. In the case of business partners who share ownership of the property in question, each has a Rs 50,00,000 investment limit.
Example of a Capital Gain Bond
For instance, you paid Rs 15,00,000 for a property in 2000 and sold it for Rs 65,00,000 in 2022. As a result, you made a long-term capital gain of Rs 50,00,000, and the long-term capital gain tax applicable to it is Rs 10,30,000 at a rate of 20.6% (inclusive of cess). However, if you invest the gain within six months in capital bonds, you will have no tax liability.
What are the other features of capital gain bonds?
- Safe investment: These types of bonds in India are not only backed by government entities, but they also have a AAA rating from credit agencies like CARE, CRISIL, and ICRA. As a result, the risk of default is almost zero.
- Assured interest: You will receive an annual interest of 5% on your investment. Previously, this rate was 6%. However, the interest income on these bonds is taxable.
- Transferability: They are not transferable.
- Tenure: They have a five-year lock-in period. However, before April 2018, these bonds were redeemable within three years.
- Investment limit: Every capital gain bond, regardless of issuer, costs Rs 10,000. The given amount is not just the minimum investment; you can buy them only in multiples of Rs 10,000. The maximum number of capital bonds you can hold is Rs 500.
- Listings: No Indian stock exchange lists capital gain bonds. Hence, you won’t find them in any specific stock exchange app.
- Eligibility: Any HUF member or individual can apply for this bond.
While there are multiple ways to invest in bonds and multiple benefits of investing in bonds, choosing a reliable stock exchange app is the best way to ensure safe investments.
How to Invest in 54EC Bonds
These bonds are not listed on stock exchanges, so you must purchase them directly from the issuer, either in demat or physical form. Here’s a step-by-step guide:
- Download the respective bond form from the issuer’s website.
- Choose the ‘direct’ option on the download page.
- Select the number of forms you need.
- Enter the captcha and download the form in ZIP format.
- Unzip and fill out the form as per the provided instructions.
- Submit the form along with a demand draft or account payee cheque at designated bank branches.
- Alternatively, deposit the amount in the respective collection account via NEFT/RTGS and complete the application form online, mentioning the UTR number.
Capital gain bonds are a common tax-saving option if you have recently sold your property. They are safe investments with a guaranteed rate of return. Investing in capital gain bonds through a zero brokerage account is generally a preferred way to move wisely.
FAQs| Capital Gain Bonds
The lock-in period for capital gains bonds is five years from the date of allotment. This means that you cannot sell, transfer, or convert these bonds into money before the completion of five years from the date of allotment.
The interest rate for capital gain bonds for 2023 is 5% per annum, payable annually. The interest rate is fixed at the time of issuance and does not change during the tenure of the bond.
The best capital gain bond depends on your investment objective, risk appetite, and tax status. Generally, capital gain bonds are suitable for investors who want to save tax on their long-term capital gains and are willing to lock in their funds for five years. Among the four issuers of capital gain bonds, NHAI and REC are rated AAA by CRISIL, while PFC and IRFC are rated AA+ by ICRA. All these bonds offer the same interest rate of 5% per annum.
The interest paid on capital gain bonds is 5% per annum, payable annually. The interest income is taxable in the hands of the investors as per their tax slab.
The interest rate of 54EC capital gain bonds is also 5% per annum, payable annually. These bonds are a type of capital gain bonds that provide tax exemption under Section 54EC of the Income Tax Act, 1961.
The 54EC bonds that are available now are issued by NHAI, REC, PFC, and IRFC. These bonds have a maturity period of five years and an interest rate of 5% per annum. These bonds can be purchased online or offline through authorized banks or brokers.
The maturity period of 54EC bonds is five years from the date of allotment. These bonds cannot be redeemed before the completion of five years.
The limit of capital gains exemption under 54EC is Rs. 50 lakhs per financial year across all issuers. This means that you cannot invest more than Rs. 50 lakhs in these bonds in a financial year from the capital gains arising from the transfer of one or more original assets.
Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.