Capital Gain Bonds

A gain from the sale of a land or a residential or a commercial property after two years from its purchase is considered long term capital gain and is taxed at the rate of 20.8% including cess after the indexation benefit. So, if you make an LTCG of 50 lakhs by selling your old house then your tax liability would be 10.4 lakhs. If you want to save these 10.4 lakhs then you have two options either reinvest the entire capital gain of 50 lakhs in a residential property under section 54 or in capital gain bonds under section 54EC. We will talk here about the second option which is capital gain bonds.

The bonds that are specified under Section 54EC 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 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 as per the slab rate which means if you fall under the tax bracket of 30% then post tax returns would be only 3.5%.
• These bonds are backed by the government and has AAA-rating, indicating their stability and security.
• The maximum amount you can invest in these bonds is Rs. 50 lakhs.
• These bonds are not listed on any stock exchange.

The bonds bought with the capital gains amount should be held by 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 If you sell the bonds before the end of 5 years, then the exemption granted under Section 54EC will be withdrawn and you have to pay LTCG tax on the original capital gains amount.

Given the low returns and lock in period of 5 years in section 54EC bonds and high transaction cost, efforts and risk involved in reinvesting in real estate, it may be the better option to pay the taxes and invest the rest of the fund in appropriate option. In long term this strategy works out to be far more beneficial than saving the tax today.

For in depth understanding and detail calculations consult a qualified financial planner.