Capital Gain Bonds – Features, Benefits, Interest Rate & Eligibility

Investing in an asset like a property is probably the easiest way to make money. You purchase a piece of land today, sell it in the future at higher prices and bag a hefty profit. However, when you think about the tax you have to pay on that profit, it can be a lot, too.

But did you know that you do not necessarily have to bear the burden of such heavy capital gains taxation? If you sell an asset you have held for over two years, you can enjoy tax exemption by investing it in the capital gain bond scheme.

So, how does this scheme help you avail of tax benefits? Let’s understand in this blog. Read on to explore important features of the capital gain bond scheme, its benefits and how to invest in one.

Features of the Capital Gain Bond Scheme You Need to Know

Capital gain bonds are available to any taxpayer in India, including individuals, Hindu Undivided Families (HUG), companies, and firms. A non-resident Indian can also benefit from the scheme if the property for sale is in India.

Here are some important features of capital gain bonds you must know:

#1. You must invest the profit within 6 months of the sale.

#2. The investment has a lock-in period of 5 years.

#3. The minimum capital gain bond limit you can invest is 1 bond which equals Rs 10,000.

#4. The maximum capital gain bond limit you can invest is Rs. 50 lakhs (500 bonds)

#5. A capital asset is long-term when you have held it for at least 2 years.

#6. These four authorities issue 54EC bonds in India: National Highway Authority of India (NHAI), Rural Electrification Corporation (REC), Indian Railways Finance Corporation Limited (IRFCL) and Power Finance Corporation (PFC).

#7. 54EC bonds are rated AAA; that is, these bonds are rated the highest corporate bonds in India in terms of safety. When you invest, you can rest assured that your funds are safe and the interest rate is stable.

#8. 54EC bonds are non-transferable

#9. It has a fixed interest of 5-6% p.a.

#10. The interest gained on capital gain bonds is taxable.

Benefits of Capital Gain Bonds

The benefits involved in investing in capital gain bonds include:

#1. Tax exemption benefits:

With capital bonds, you can save up to Rs. 50 lakhs of tax on the income generated from your long-term capital assets sale.

#2. Interest generation:

The investment allows you to enjoy tax deduction, save, and earn. You can withdraw the interest generated, which can serve as a source of regular income.

#3. Secure investment:

54EC bonds are rated AAA, i.e., it is one of the highest-rated investments in terms of safety. It is low-risk and creditworthy.

#4. Capital lock-in:

The minimum years for the investment is 5 years. After 5 years, you can choose to renew your bonds or sell them. This helps in wealth creation and achieve your long-term financial goal.

#5. Easy accessibility:

A capital gain bond holder can hold their bonds in either a Demat account or physical form. You can also apply for the bonds online and physically at the financial institution.

Who is eligible to invest in 54EC bonds?

The following entities are eligible to invest in 54EC bonds-

1. Resident individuals

2. Non-resident individuals

3. Hindu Undivided Family (HUF)

How to Calculate Tax Exemption Under 54EC?

Let us walk you through the tax exemption calculation under the 54EC using a case study.

Suppose Arjun purchased a piece of land in 2019 for Rs 40 lakhs and sold it in 2023 for Rs 70 lakhs. The indexed cost of acquisition is Rs 45 lakhs.

As we know, the long-term capital gain equals the amount of the sale minus the cost of acquisition. So, Arjun will earn Rs 25 lakhs as a capital gain.

Arjun now has two choices. First, invest a part of the profit or invest the entire Rs 25 lakhs in a capital gain bond. Let’s see how the two decisions will affect the capital gains tax.

#1. Rs 10 Lakh is invested in NHAI bonds within 6 months

#2. Rs 25 lakhs is invested in REC within 6 months

As you can see, Arjun will pay a long-term capital gain tax on the remaining amount if he only invests a part of the profit from the property sale. However, if he invests his entire profit in a capital gain bond scheme, he will be exempted from paying any tax.

Why should you invest in capital gains bond?

Here are a few reasons to consider capital gain bonds-

1. Stable returns

Capital gains bonds carry a fixed interest rate which ensures stable and predictable returns over the tenure of the investment. This stability makes it an attractive option for risk-averse investors seeking decent returns.

2. Low risk

They are typically issued by government agencies and rated ‘AAA’ by credit-rating agencies which assures high level of creditworthiness. 

3. Capital gains tax deferral

What makes capital gains bonds an attractive investment choice is their ability to defer payment of capital gains tax. If you have sold an asset such as property or stocks and generated capital gains, you can invest the proceeds in these bonds to defer the tax payment.

4. Long-term investment

If you're an investor with a long-term investment horizon, capital gains bonds are an ideal choice since they offer great tax benefits, are stable, and secure. 

What are the steps to invest in the long-term capital gain bonds scheme?

You can invest in capital gain bonds online. Here is what investment process look like:

#1. Decide which bond scheme you want to invest in and the issuer.

#2.  Once you have decided which bond you want to invest in, visit the issuer’s website.

#3. Click the link for the respective capital gain bond scheme. You will be redirected to the website of that scheme.

#4. Now, tick the Direct option, select the number of forms, and complete the captcha security field. Then, click the download button.

#5. Fill the forms and submit them to the issuer’s branch. Make sure to attach a demand draft, payee cheque, and other documents with the form.

#6. Finally, deposit your money in the scheme account using net banking.

Bonds eligible under section 54EC

The government of India has specified a list of bonds eligible under section 54EC-

1. Bonds issued by Power Finance Corporation Limited

2. Bonds issued by Railways Finance Corporation Limited

3. Bonds issued by National Highways Authority of India

4. Bonds issued by Rural Electrification Corporation

These bonds have a fixed maturity period of 5 years. The proceeds from the bonds on maturity or after selling the bonds under certain circumstances are exempt from tax up to Rs. 50 lakhs under section 54EC. However, if the bonds are sold or converted into cash before maturity, the invested amount earlier eligible for tax exemption will now be considered long-term capital gain and taxed accordingly.

Wrapping up

Capital gain bonds are most suited for investors who earn capital asset gains and want to save it by investing it. The investment is stable, allowing you to earn while you save. 

If you want to invest in mutual funds, apply for insurance, or avail of personal loan, turn to Tata Capital for all your financial needs. With Tata Capital, you can avail of all these financial services online. And our team of experts ensures that you get the best suite of our offerings based on your needs and wants.

FAQs

What is the lock-in period for Capital Gains Bonds?

Capital gains bonds have a lock-in period of 5 years and are redeemable after the maturity.

Are the interest earnings from Capital Gains Bonds taxable?

Yes, the interest earnings from capital gains bonds are taxable as per the individual’s tax slab rate.

Can 54ec Bonds be held in a DEMAT account?

Yes, 54EC bonds can be held electronically in a DEMAT account, facilitating convenience and easy management.

When do investors have to invest in 54EC Bonds after selling an asset for claiming an exemption?

Investors must invest in 54EC bonds within 6 months of selling an asset to claim tax exemption under section 54EC.