Tax liabilities are huge concerns in the investment market. Naturally, investors look for different tax saving mechanisms to reduce tax and maximise their earnings. There are several ways to shrink tax within legal provisions. Capital gain bonds, or the 54EC bonds, are among the tax-saving instruments currently available in India.
How Capital Gain Bonds Work
Long-term capital gains received from the sale or transfer of long-term assets, like buildings and lands, are subject to tax deduction as instructed by the nation’s law. However, you can eliminate the tax implications by investing the capital gains in certain bonds, which are referred to as capital gain bonds or 54EC bonds.
They are much like traditional, fixed-income bonds, sharing similar features and benefits. The investment amount makes them distinct.
Provisions for Capital Gain Bonds
The following terms and conditions must be met for successful capital gain bond investments.
- Asset Holding Period: The property must be held for a minimum of 2 years or 24 months before the sale or transfer.
- Investment Window: The capital gains must be invested within 6 months from the transfer date.
- Lock-In Period: The bonds cannot be converted, transferred, or used as collateral for 5 years from the acquisition date.
- Investment Ceiling: The investment amount must not exceed INR 50 lakhs in a fiscal year. The minimum cap is INR 20,000.
- Type of Tax Exemption: The entirety of the accrued capital gains must be invested for total tax exemption. Otherwise, only a portion of the capital gains will be tax-free.
Important to note:
- Deductions cannot be claimed under any other section of the Income Tax Act.
- Interest generated under these bonds is subject to tax deduction.
Applicable 54EC Bonds
54EC bonds are issued by government-approved entities such as the National Highways Authority of India (NHAI), Power Finance Corporation Limited (PFC), Rural Electrification Corporation (REC), and Indian Railway Finance Corporation (IRFC) Limited.
Key Features of Capital Gain Bonds
Besides tax exemption, capital gain bonds have more lucrative offerings.
- Low Risk: 54EC bonds are mostly issued by government entities with AAA ratings, which significantly reduces the chance of default and categorises them as safe investment options.
- Stable Returns: Capital gain bonds generate interest at a fixed rate throughout the maturity period, ensuring stability and predictable returns.
- Long-Term Investment Option: These bonds present long-term investment opportunities with attractive benefits.
Eligibility Criteria for Capital Gain Bonds
The following investors are eligible for capital gain bonds:
- Individual Residents
- Hindu Undivided Family (HUF) Members
- Non-Resident Individuals
As per the Income Tax Act’s provisions and specific circumstances at the time of investment, entities like trusts can become eligible for capital gain bonds.
Wrapping Up!
54EC bonds or capital gain bonds combine the convenience of fixed-income investment with the benefit of tax exemption, providing an exciting investment opportunity. The interest provided by such bonds varies depending on the bond issuer, which should be considered when comparing available options.
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FAQs About What are Capital Gain Bonds (54EC Bonds)?
1. Is the interest on capital gain bonds taxable?
Interest accumulated under the capital gain bonds is taxable as per individual tax slab rate.
2. Can I hold a capital gain bond in my Demat account?
Capital bonds can be held in Demat accounts. Electronic holding makes investment management easy and convenient.
3. Is there any minimum or maximum limit on the number of bonds one can invest in?
Investment can be made in a minimum of 2 bonds and a maximum of 500 bonds in a fiscal year.
