What are the Steps Involved to Invest in Capital Gain Bonds?
54EC bonds, more popularly known as capital gain bonds, are fixed income instruments that offer exemption from capital gains tax to investors, as per section 54EC. The tax liability when it comes to long-term capital gains from the sale of immovable real estate or property can be significantly minimised by buying 54EC bonds.
What is Section 54EC in Capital Gain Bonds?
According to the established provisions of Section 54EC, capital gains coming in as a part of the transfer of long-term capital assets will be exempted if the given conditions are met:
The asset in question should, in actuality, be a long-term capital asset. It can be land, a building, or both.
The capital gains earned must be used or invested within half a year from the asset’s transfer date.
Example on Section 54EC in Capital Gain Bonds
To understand Section 54EC more clearly, let us consider an example. A person named “X” had a building. He sold it on 1st January 2022. The capital gains earned from the sale of the building were around Rs. 70 lakhs. Hence, assuming Mr X decides to invest the amount earned within half a year from the date of sale, he is eligible to claim up to Rs. 50 lakhs as per the exemption stated under Section 54EC.
Exemption Under Section 54EC in Capital Gain Bonds
Multiple types of bonds qualify for a deduction of tax or exemption as per provisions stated under section 54EC of the Income Tax Act, 1961. Here is a list including all of them:
NHAI (National Highway Authority of Indian) Bonds
REC (Rural Electrification Corporation Limited) Bonds
Capital Gain Bonds by IRFC, NHAI, PFC, and REC
The bonds specified under the Income Tax Act’s Section 54EC are issued by the IRFC, NHAI, PFC, and REC. Here is a look at some of the most prominent features of these bonds:
All such bonds are AAA-rated, indicating that investing in them is safe and secure.
Interested individuals can purchase these bonds either physically or in the demat form.
How to Calculate the Tax Exemption Allowed Under Section 54EC?
To understand how tax exemption is calculated, let us consider an example. There is a person named Mr Y who has property. The property was purchased for Rs. 50 lakhs, and was sold at Rs. 80 Lakhs. Furthermore, let us assume the acquisition’s indexed cost is Rs. 43 Lakhs. Now, let us assume that Mr Y decides to invest Rs. 20 lakhs in the first 6 months into REC bonds. In such a case, the capital gains can be calculated in the following methods:
Sale Consideration = Rs. 80 Lakhs
Less: Acquisition’s Indexed Cost = Rs. 43 Lakhs
What are the Features of the Capital Gain Bonds?
Here are some of the most prominent features of 54EC bonds:
These bonds are AAA-rated, which indicates that they are safe and reliable to invest in.
These bonds are not present on any stock exchange listings.
What are the Steps Involved to Invest in Capital Gain Bonds?
Here are the steps following which individuals can invest in these bonds:
Step 1 – Download the required bonds’ form.
Step 2 – Opt for the “Direct” option on the download webpage.
How do Capital Gain Bonds help in Tax Exemptions?
Capital gains tax help in tax exemptions only when the following conditions are met and fulfilled:
The amount to be invested must originate from capital gains arising from a property’s sale.
The invested amount should not go beyond the limit of Rs. 50 lakhs.
Section 54EC- Deduction on LTCG Through Capital Gain Bonds
Section 54EC is considered a very important section in the Income Tax Act since it provides individuals relief from tax on long term capital gains at an impressive rate of 20%. This facilitates individuals to minimise their tax liability. Besides this, it also helps them profit from interest income on such bonds at an annual rate of 5.75%.