Capital Gain Bonds are tax-saving bonds under section 54EC. Hence, they are also sometimes called ‘54EC bonds.’ You can invest long term capital gains from sale of property or land in these bonds to avoid paying capital gains tax. Only a few issuers like Rural Electrification Corporation (REC), Power Finance Corporation (PFC), IRFC (Indian Railways Finance Corporation) can issue capital gains bonds. These issuers are AAA rated which makes their bonds low risk.
Capital gains bonds are bonds that help investors save long-term capital gains arising from the sale of a capital asset (like land or property).
Income tax section 54EC discusses the benefits of capital gains bonds.
Investors who have realized long term capital gains due to the sale of land or property should consider investing in capital gains bonds.
Investors who have realized long-term capital gains from selling land/property can invest in capital gains bonds. Other investors cannot invest in these bonds even if interested.
Yes, NRIs are eligible to invest in capital gains bonds and claim tax exemption if they have realized long term capital gains from the sale of land/property.
Presently, the interest rate offered by capital gains bonds is 5%. The interest is paid out annually or once a year.
Eligible investors can invest only up to Rs. 50 Lakh in capital gains bonds in a given financial year. The minimum investment required at a time is Rs. 10,000. Additionally, to avail of benefits under section 54EC, it is critical that investment is done within 6 months of the sale of the asset.
Capital gains bonds have a lock-in period of 5 years from the investment time. Capital gains bonds cannot be sold until the bond's maturity date.
Capital gains bonds are unlisted. Hence the following taxation applies on these bonds.
Taxation on interest of capital gains bonds: Interest earned from capital gains bonds is added to your annual income and taxed as per your marginal income tax slab rate.
Taxation on capital gains of capital gains bonds: Since it is not possible to transfer the bonds before maturity, there is no capital gains that can be realized by selling these bonds. Hence, capital gains taxation is not applicable.
Capital gains bonds are mentioned under Income Tax section 54EC. Hence, capital gains bonds are also called 54EC bonds.
54EC bonds can be issued only by specific government-backed companies. These are REC (Rural Electrification Corporation), PFC (Power Finance Corporation), NHAI (National Highways Authority of India) and IRFC (Indian Railways Finance Corporation.
The credit default risk of these bonds is extremely low since the issuers are government-owned and controlled public sector companies. However, the interest rate that these bonds offer is quite low: 5%. There is a high risk of losing money to inflation on a post-tax (or even pre-tax) basis.
The primary advantage of investing in capital gains bonds is the investor gets to enjoy tax exemption of up to Rs. 50 Lakh in a financial year. Another advantage is the highest safety of the bonds because the issuers are government owned PSUs. Since these bonds cannot be liquidated before maturity, it eliminates the price risk and liquidity risk that is associated with other bonds if they are traded or sold before maturity.
There are very few capital gains bonds options at any given time. And barring the issuer, all the other aspects of capital gains bonds are standard - maturity period, interest rate etc. Hence, there are no best capital gains bonds. Investing in any capital gains bonds will do the job for eligible investors.
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