In order to reduce the amount of tax that you need to pay for your capital gains, you may choose to invest the profit earned from the sale of your property on capital gain bonds that are issued by NHAI and REC under Section 54EC.
Long-term capital gains (LTCG) are taxable under the Income Tax Act. However, you can get exemption on LTCG tax under Sections 54, 54F and 54EC. While the Sections 54 and 54F pertain to purchasing a house with the capital gains made, Section 54EC allows you to claim exemption from LTCG tax on purchase of notified government bonds.
Exemption Under Section 54EC
Section 54EC states that if the profit made on sale of a long-term capital asset – whether an immovable property or shares and stocks – is invested by the taxpayer in ‘long-term specified assets’ within 6 months of the sale, then the capital gains are exempt from taxation. The ‘long-term specified assets’ referred to here are government notified bonds and securities, such as those released by the National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC).
However, you cannot invest more than Rs. 50 lakh in these bonds in total. If your total capital gains are higher than Rs. 50 lakh, you may also want to build a house and avail the benefits of Sections 54 or 54F instead of buying bonds under Section 54EC. But if you are not able to opt for either of the above options, you will have to pay LTCG tax on the remaining capital gains amount.
The bonds bought with the capital gains amount should be with the taxpayer for at least 3 years. If you sell the bonds before the end of 3 years, then the exemption granted under Section 54EC will be withdrawn and you have to pay LTCG tax on the original capital gains amount.
Capital Gains Bonds by NHAI and REC
The bonds that are specified under Section 54EC are issued by the NHAI and REC. The key features of these bonds are:
- These bonds give an interest rate of 6%. Income tax has to be paid on the interest accrued, however, as per the tax slab of the individual.
- These bonds are AAA-rated, indicating their stability and security.
- You can buy the bonds physically or in demat format.
- Each bond costs Rs. 10,000 – which means that these bonds can be bought only in the multiples of Rs. 10,000, capped at 500. The maximum amount you can invest in these bonds is Rs. 50 lakh.
- These bonds are not listed on any stock exchange.
- The documents required to buy these bonds are: self-attested copy of the PAN card, self-certified address proof copy, and 1 cancelled cheque.
You may want to buy capital gains bonds only if the amount you have made as capital gains is low. If the amount is large enough to buy or build a house, the residential property would be a better investment because of greater capital appreciation.