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 5 years. If you sell the bonds before the end of 5 years, then the exemption granted under Section 54EC will be withdrawn and you have to pay LTCG tax on the original capital gains amount.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 Gain Bonds by IRFC, NHAI, PFC, and REC
The bonds that are specified under Section 54EC are issued by the IRFC, NHAI, PFC, and REC. The key features of these bonds are:
- These bonds give an interest rate of 5% p.a. 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.
FAQs On Capital Gain bonds
- What is the lock-in period for the capital gains bonds?
- What are the bonds eligible for exemption under Section 54EC of the IT Act?
- What is the rating of the capital gains bonds issued by the above-mentioned institutions?
The lock-in period for the capital gains bonds is 5 years.
The bonds that are eligible for exemption under Section 54EC of the IT Act are issued by the Rural Electrification Corporation Limited or REC, National Highway Authority of India or NHAI, Power Finance Corporation Limited or PFC bonds, and Indian Railway Finance Corporation Limited or IRFC.
The capital gain bonds issued by IRFC, NHAI, PFC, and REC have a AAA rating.