Capital Gains Tax Exemption Bonds

 

The Capital Gains Tax Exemption Bond or 54EC Bonds are bonds in which investments offset the long term capital gains (LTCG) that investors make on capital gains. Only LTCG earned by selling a residential flat or independent house, which you owned for at least three years, can be invested in this bond.

The main objective of this 3-Year bond is to avoid paying income tax on LTCG. Gains made on capital transfer need to be invested in this bond within six month from the sale of capital assets in order for the proceeds of such sale to be exempt from capital gains tax. However, the interest earned on these bonds is fully taxable.

  • Bonds are capital protected
  • Bonds are Return Guaranteed
  • Bonds are not inflation protected
  • Interest rate varies across bond issuers
  • Bonds are Illiquid for 3 years – No loans allowed against security of bond
  • Maximum Investment: Rs.50 lakh in a financial year to avail tax benefits
  • Tenure: 3 Years – No exit option
  • NRIs can invest on non-repatriation basis only

Tax Implications:

To claim Section 54 EC following conditions is to be satisfied.

  • Long term capital asset means any capital asset held by the assessee for more than 3 years
  • If the assessee has sold the long term capital asset during the previous year and made a long term capital gain then he can invest the money from the capital gain in capital gain bonds and save tax on the LTCG.
  • Amount to be invested in bonds is only capital gain and not net consideration received on sale of long term capital asset
  • Amount of capital gain should be invested in capital gain bond within 6 months from the date of transfer of sale of capital asset
  • Investment in 54 EC Bond does attract any tax
  • Interest payout is treated as income and taxed
  • These bonds make sense for risk averse investors.
  • Bonds carry no cost in the form of brokerage.
  • You can time the sale to use the six month investment window in this bond to fall in two different financial years to maximize the tax savings on the gains that you have made.
  • 12% rate of return is a break-even point. This means you may consider paying a 20% tax on LTCG and investing in an alternate instrument only if your expected rate of return is more than 12%. Anything less than 12% it is best to invest the amount in 54 EC bonds