The Gains that arise on the sale of a Long Term Capital Asset are known as Long Term Capital Gains and Capital Gains Tax is levied on such gains. However, such tax can be saved if this amount is invested in Capital Gains Bonds specified under Section 54EC within 6 months from the date of sale of the previous asset.
- Recommended Read: Exemption from Capital Gains
It should however be noted that the exemption from Capital Gains is only available in case the asset sold is Land or Building (whether Residential or Commercial or otherwise) which was held for more than 2 years. If the Land/Building that has been sold was held for less than 2 years, it would be classified as a Short Term Capital Asset and tax would be levied on such assets as per the applicable Income Tax Slab Rates.
- Recommended Read: Current Income Tax Slab Rates
Capital Gain Bonds by NHAI/ REC/ PFC/ IRFC
These Capital Gain Bonds which help in saving tax can be issued by
- National Highway Authority of India (NHAI) and
- Rural Electrification Corporation of India (REC)
Apart from the above the 2, the bonds issued by the following organisations are also now eligible to claimed as an exemption under Section 54EC
- Power Finance Corporation (PFC)
- Indian Railways Finance Corporation
The Interest Rate on the Capital Gains Bonds is 5.75%. The Interest @ 5.75% is payable annually by all the 4 organisations mentioned above. Before 1st April 2018 – the Interest Rate was 5.25% but w.e.f 1st April 2018 – the interest rate has been increased to 5.75% for all bonds purchased after 1st April 2018.
It should be noted that the interest is not tax free and tax on interest would be liable to be paid as per the income tax slabs of the taxpayer. Thus, only the amount invested is exempted from Capital Gains Tax. The Interest that is earned on these bonds is liable to income tax.
The Bonds issued by all the above 4 organisations are AAA Rated Bonds indicating that they are highly stable and the face value of each bond is Rs. 10,000. The buyer can purchase multiple bonds of Rs. 10,000 if he intends to invest more in these bonds.
However the maximum no. of Bonds that can be purchased by an investor is 500. Therefore the maximum investment allowed in these bonds in a year is limited to 500 x 10,000 i.e. Rs. 50 Lakhs. The maximum capital gains exemption that can be claimed by a taxpayer under Section 54EC is also limited to Rs. 50 Lakhs.
Prior to Budget 2014, this limit of Rs. 50 Lakhs was for each financial year. However, Budget 2014 introduced an amendment and now this limit of Rs. 50 Lakhs is the aggregate maximum exemption allowed under Section 54EC irrespective of the financial year. This amendment can be explained with the help of an example.
For eg: Mr. A sold a House in January 2013 and earned a Capital Gain of Rs. 1 Crore. Now the time limit for investment under Section 54EC is 6 months i.e. he can invest till July 2013. Now he invests Rs. 50 Lakhs in Feb 2013 and another Rs. 50 Lakhs in June 2013 in Capital Gains Saving Bonds.
In such a case, prior to Budget 2014 – the total capital gains exemption allowed would have been Rs. 1 Crore as the limit of Rs. 50 Lakhs was for investment in each financial year. However, after the introduction of Budget 2014, this limit has been reduced to an aggregate of Rs. 50 Lakhs irrespective of the financial year and therefore the capital gains exemption allowed in the above mentioned example would be limited to Rs. 50 Lakhs only.
Other Features of Capital Gain Bonds
- The Capital Gain Bonds are non-transferable, non negotiable and cannot be offered as a security for any advance or loan.
- The Bonds are issued for a period of 5 years and cannot be sold before 5 years as required by Section 54EC. These Bonds are not listed on any stock exchange. (Increased from 3 years to 5 years in Budget 2018 and applicable with effect from 1st April 2018)
- At the time of purchase of these bonds, the buyer is required to submit self-attested copy of the PAN Card, self certified copy of Address Proof of the 1st Applicant and 1 Cancelled Cheque.
- These Capital Gain Bonds can either be held in physical form or demat form.
- If the amount has been paid for the purchase of the bonds, the application cannot be withdrawn.
- It is advisable that the investors keep a photocopy of the submitted application form.
Should you invest in Capital Gain Bonds?
The Interest paid on these Capital Gain Bonds of 5.75% is lower as compared to the Interest paid on a Fixed Deposit which is around 7%. However, the major benefit of the investing in these capital gain bonds is not the interest earned but the Capital Gains Tax which is being saved.
To help our readers understand the benefit of investing in Capital Gain Bonds, we have done an analysis of the benefit which would arise to the taxpayer if he invests in Capital Gain Bonds. The analysis has been shared below:-
|Amount of Capital Gains||Rs. 50,00,000|
|Amount invested in Capital Gain Bonds||Rs. 50,00,000|
|Tax saved on this Investment @ 20.8% (incl Cess)||Rs. 10,40,000|
|Interest earned in Year 1 @ 5.75%||Rs. 2,87,500|
|Interest earned in Year 2 @ 5.75%||Rs. 2,87,500|
|Interest earned in Year 3 @ 5.75%||Rs. 2,87,500|
|Interest earned in Year 4 @ 5.75%||Rs. 2,87,500|
|Interest earned in Year 5 @ 5.75%||Rs. 2,87,500|
|Total Benefit||Rs. 24,77,500|
|Percentage Return in 5 years||49.55%|
|Annualised Return (Simple Interest)||9.91%|
On an Investment of Rs. 50,00,000 the Total Benefit arising in this case is Rs. 24,77,500. In other words, this benefit is of 49.55% in a period of 5 years i.e. 9.91% per annum (simple interest). The compound interest would be even lower.
If you think you can generate a return of more than 9.91% per annum for the next 5 years, then it does not make sense to be investing in the Capital Gain Bonds. However, if you think it would be difficult for you to generate a return of more than 9.91% then you should opt for these Capital Gain Bonds.
e-Book on Capital Gains Exemption
To help our readers understand How Capital Gains Tax is levied on Real Estate Transactions and How Tax can be saved on Real Estate Transactions, we have authored a book which explains in simple words with 40+ Examples the Manner of Levy of Capital Gains Tax on Real Estate Transactions. The e-book can be purchased through this link.
The main topics covered in the e-book are:-
1. Computation of Capital Gains
2. Tax on sale of Inherited Property
3. Tax on sale of Under-Construction Property
4. Sale of Property below Circle Rate/ Stamp Valuation Rate
5. Capital Gains Exemptions on sale of Property
6. TDS on sale of Property
7. Comprehensive Examples
Total No. of e-books sold till date: 10,000+
The e-book can be purchased for Rs. 147 from here – e-Book on How to Save Capital Gains Tax.