CAPITAL GAIN AND TAX FREE BONDS

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54EC Bonds or Capital Gains Bonds

54EC Bonds or Capital Gains Bonds is one such instrument to consider and know about, which will get you an exemption from the capital gains tax that you might have incurred on a long term asset provided certain conditions are met. Most importantly the taxpayer will have to, within 6 months of sale or transfer, reinvest the proceeds from the sale of a long term asset into a 54EC bond.

Before we go into further details about reinvesting in 54EC bonds, let’s look at what section 54EC of the Income Tax Act talks about.

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Section 54EC of the Income Tax Act 1961, exempts a capital gain from any tax implication where “the capital gain arises from the transfer of a long-term capital asset and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be exempt from tax under Section 45 as long as the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset”.

The exemption will be the amount of capital gain or the amount of investment made, whichever is less. The exemption is subject to :

  • The investment is made within a period of 6 months from the date of transfer of the asset
  • Maximum investment limit of up to Rs. 50 Lakhs in a Financial Year per individual.
  • If the amount invested in bonds is less than the capital gains realized, only proportionate capital gains would be exempt from tax.

The eligible bonds under Section 54EC are REC (Rural Electrification Corporation Ltd), PFC (Power Finance Corporation Ltd), NHAI (National Highways Authority of India) and IRFC (Indian Railways Finance Corporation Limited).

Key Features Of 54Ec Bonds

  • Safe and Secure : 54EC bonds are AAA rated and are issued by PSUs backed by Government of India.
  • Interest Rate : 54EC bonds offer 5% rate of interest payable annually.
  • Tax implication : Interest on 54EC bonds is taxable. The principle is tax-free on maturity.
  • Tenure : 54EC bonds have a lock-in period of 5 years and are non-transferable.
  • Investment amount : The minimum investment in 54EC bonds is 1 bond amounting to Rs. 10,000 and the maximum investment in 54EC bonds is 500 bonds amounting to Rs 50 lakhs in a financial year.
  • Mode of Holding : 54EC bonds can be held either in Physical form or in Demat Form.