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What are Capital Gain Bonds?

54EC bonds, more popularly known as capital gain bonds, are fixed income instruments that offer exemption from capital gains tax to investors, as per section 54EC. The tax liability when it comes to long-term capital gains from the sale of immovable real estate or property can be significantly minimised by buying 54EC bonds.

The individuals who purchase the bonds are deemed to be debt-holders or creditors of the financial institution which has issued the bonds. Generally, 54EC bonds are issued by infrastructure companies that have support from the government. Thus, the risk quotient is very low in purchasing these bonds. They are redeemable before the maturity date. However, these bonds cannot be sold since they are not listed on the stock exchange. 54EC bonds are also fully taxable.

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What is Section 54EC?

According to the established provisions of Section 54EC, capital gains coming in as a part of the transfer of long-term capital assets will be exempted if the given conditions are met:

  • The asset in question should, in actuality, be a long-term capital asset. It can be land, a building, or both.
  • The capital gains earned must be used or invested within half a year from the asset’s transfer date.
  • The amount should be put into specific capital gain bonds of the REC (Rural Electrification Corporation), NHAI (National Highway Association of India), PFCL (Power Finance Corporation Limited), or IRFC (Indian Railway Finance Corporation).

  • Since the upper limit stated under Section 54EC is Rs. 50 lakhs, the investment amount must not exceed Rs. 50 lakhs.

Example on Section 54EC

To understand Section 54EC more clearly, let us consider an example. A person named “X” had a building. He sold it on 1st January 2022. The capital gains earned from the sale of the building were around Rs. 70 lakhs. Hence, assuming Mr X decides to invest the amount earned within half a year from the date of sale, he is eligible to claim up to Rs. 50 lakhs as per the exemption stated under Section 54EC.

Exemption Under Section 54EC

Multiple types of bonds qualify for a deduction of tax or exemption as per provisions stated under section 54EC of the Income Tax Act, 1961. Here is a list including all of them:

  • NHAI (National Highway Authority of Indian) Bonds
  • REC (Rural Electrification Corporation Limited) Bonds
  • IRFC (Indian Railway Finance Corporation Limited) Bonds

  • PFC (Power Finance Corporation Limited) Bonds

Capital Gain Bonds by IRFC, NHAI, PFC, and REC

The bonds specified under the Income Tax Act’s Section 54EC are issued by the IRFC, NHAI, PFC, and REC. Here is a look at some of the most prominent features of these bonds:

  • All such bonds are AAA-rated, indicating that investing in them is safe and secure.
  • Interested individuals can purchase these bonds either physically or in the demat form.
  • These bonds offer an interest rate of 5% annually. However, Income tax has to be paid by individuals according to the interest accrued, as per their tax slab.
  • Every bond’s price is fixed at Rs. 10000, and the maximum investment limit is Rs. 50 lakhs.

  • These bonds are not present on any stock exchange listings.

How to Calculate the Tax Exemption Allowed Under Section 54EC?

To understand how tax exemption is calculated, let us consider an example. There is a person named Mr Y who has property. The property was purchased for Rs. 50 lakhs, and was sold at Rs. 80 Lakhs. Furthermore, let us assume the acquisition’s indexed cost is Rs. 43 Lakhs. Now, let us assume that Mr Y decides to invest Rs. 20 lakhs in the first 6 months into REC bonds. In such a case, the capital gains can be calculated in the following methods:

Sale Consideration = Rs. 80 Lakhs

Less: Acquisition’s Indexed Cost = Rs. 43 Lakhs

Long Term Capital Asset = Rs. 37 Lakhs

Amount Invested in REC Bonds = Rs. 20 Lakhs

Taxable Long Term Capital Gains = Rs. 17 Lakhs

What are the Features of the Capital Gain Bonds?

Here are some of the most prominent features of 54EC bonds:

  • These bonds are AAA-rated, which indicates that they are safe and reliable to invest in.
  • These bonds are not present on any stock exchange listings.
  • Interest income on these bonds is taxable in the bondholder’s hands.

  • By investing in such bonds, individuals can claim exemption amounts up to Rs. 50 lakhs as per the provisions stated under Section 54EC.

What are the Steps Involved to Invest in Capital Gain Bonds?

Here are the steps following which individuals can invest in these bonds:

Step 1 – Download the required bonds’ form.

Step 2 – Opt for the “Direct” option on the download webpage.

Step 3 – Enter the total number of forms you wish to download.

Step 4 – Enter the correct captcha and click on “Download”

Step 5 – Unzip the downloaded ZIP file to extract the form.

Step 7 – Print the form and fill it up according to the instructions.

Step 8 – Investors are required to attach an account payee cheque or a demand draft along with other essential enclosures at the specified outlets of collecting banks.

Step 9 – Deposit the amount into the respective collection account via NEFT/RTGS services and fill up the application forms listed on the website. Make sure to mention the UTR number in the form’s mentioned space.

How do Capital Gain Bonds help in Tax Exemptions?

Capital gains tax help in tax exemptions only when the following conditions are met and fulfilled:

  • The amount to be invested must originate from capital gains arising from a property’s sale.
  • The invested amount should not go beyond the limit of Rs. 50 lakhs.
  • Individuals should make an investment in NHAI or REC bonds within 6 months from the date of the property’s sale.

If any person does not invest the amount within the stated time frame, they can deposit the investment amount in a PSU or Public Sector Bank. If this happens, the deposit made will be seen as an investment in capital gain bonds in India, wherein tax exemption can be availed as per the regulations stated under the Capital Gains Account Scheme, 1988.

On the other hand, if the deposit is not converted into an investment within the 2-year mark, it will be deemed a short-term capital gain in the expiration year.

Section 54EC- Deduction on LTCG Through Capital Gain Bonds

Section 54EC is considered a very important section in the Income Tax Act since it provides individuals relief from tax on long term capital gains at an impressive rate of 20%. This facilitates individuals to minimise their tax liability. Besides this, it also helps them profit from interest income on such bonds at an annual rate of 5.75%.

Key Factors to Avail the LTCG exemption by Investment in Capital Gain Bonds

To avail LTCG exemption by investment, the following conditions must be met:

  • An investment must be made within 240 days or 6 months from the immovable property’s sale date.
  • The invested amount can only be reclaimed after 5 years.
  • Exemption on the invested amount is only allowed against long term capital gains earned by the sale of the immovable property.
  • The exemption is available only up to a maximum limit of Rs. 50 lakhs.

Should You Purchase Capital Gain Bonds of NHAI & REC to Save Tax?

The interest earned by individuals on 54EC bonds is comparatively lower than the interest paid on an FD. However, the major benefit of opting for such bonds of NHAI & REC is not the interest earned but the tax saved.

Any individual who can generate a return of over 9.91% annually for the next 5 years, investing in capital gain bonds is not the best option. However, if they think that they will find it difficult to surpass the return rate of 9.91%, it would be best to invest in these bonds issued by NHAI & REC.

Capital Gain Bonds by NHAI & REC

Capital gain bonds issued by the NHAI (National Highways Authority of India) or the REC (Rural Electrification Corporation of India) help in saving tax.

5.75% is the interest rate on these bonds. The interest is payable by both bodies, namely NHAI and REC.

However, it should be kept in mind that interest is not tax-free, and the tax incurred on the interest would be liable to be paid to the taxpayers according to their income tax slabs.

FAQs

The lock-in period is 5 years.

The bonds eligible for exemption under Section 54EC of the IT ACT include the ones issued by the REC, NHAI, PFC, and IRFC.

Capital bonds issued by the REC, NHAI, PFC, and IRFC feature an AAA rating.

No. The exemption granted under Section 54EC will be withdrawn.

Yes. NRIs are allowed to claim the exemption allowed under Section 54EC.

Yes. If the property is jointly owned, each owner’s capital gains will be determined and calculated separately.

The interest rate on such bonds is 5.75%.

The maximum amount that can be invested in these bonds is Rs. 50 lakhs

No. It is not possible to invest more than Rs. 50 lakhs.