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Overview on bonds under Section 54EC & Taxation aspects
Section 54EC bonds, commonly known as capital gain bonds, are an effective way for investors to save on long-term capital gains (LTCG) tax. If you sell a capital asset like real estate, shares, or other qualifying assets and make a long-term capital gain, you can invest that gain in 54EC bonds to get an exemption from tax on the capital gains.
Key Aspects of Section 54EC Bonds:
- Who Can Claim Exemption?
- Any taxpayer (individuals, HUFs, companies, LLPs, firms, etc.) can claim exemption under Section 54EC.
- Eligible Assets:
- Only long-term capital gains from the sale of immovable property (land, building, or both) qualify.
- The property must be held for at least 24 months prior to the sale.
- Investment Timeline:
- The taxpayer must invest the capital gains in eligible bonds within 6 months of the sale of the property.
- Issuer: Eligible bonds under Section 54EC include:
- National Highways Authority of India (NHAI) bonds.
- Rural Electrification Corporation (REC) bonds.
- Power Finance Corporation (PFC) bonds.
- Indian Railway Finance Corporation (IRFC) bonds.
- REC (Rural Electrification Corporation Ltd.)
- PFC (Power Finance Corporation Ltd.)
- IRFC (Indian Railways Finance Corporation Ltd.)
- Other bonds as notified by the government.
- Maximum Investment:
- The total investment eligible for exemption is INR 50 lakh in a financial year and the subsequent financial year combined.
- Lock-in Period:
- The bonds have a 5-year lock-in (previously 3 years until April 2018).
- They cannot be transferred, converted, or used as collateral until the lock-in period ends.
- Taxable on Premature Redemption:
- If the bonds are redeemed or converted before maturity, the capital gains originally exempted become taxable in the year of conversion.
How to Invest in 54EC Bonds:
- Download Forms: Forms can be downloaded from the issuer’s website (REC, PFC, IRFC, etc.).
- Fill Forms: Complete the form with necessary details and attach a demand draft, cheque, or NEFT/RTGS payment details.
- Submission: Submit the form at designated branches of authorized banks like Axis Bank, Canara Bank, SBI, HDFC, ICICI, etc.
In Summary:
These bonds offer tax exemption only on long-term capital gains (assets held for more than 2 or 3 years depending on the asset type). There is no benefit for short-term capital gains. You can invest up to INR 50,00,000 in these bonds in a financial year. This investment must be made within 6 months of realizing the capital gains to avail of the tax benefit. These bonds come with a 5-year lock-in period. During this time, the bonds cannot be redeemed or liquidated, making them a long-term investment. The interest rate on these bonds is generally around 5% to 5.25% per annum, which is lower compared to other investment options but comes with the advantage of tax savings. While the principal amount qualifies for capital gains exemption, the interest earned is taxable as per your income tax slab. By investing the capital gains in these bonds, you defer or avoid paying LTCG tax, making it a useful tax-saving tool for individuals with significant gains from property or other assets.