Capital Gains Tax Saving Bonds

Investment in capital gain bonds is done in order to save on long term capital gains (LTCG) tax on property sale. Therefore these bonds are called or known as capital gain (CG) bonds. Capital gain bonds are the fixed income financial product/ instrument. Government of India is the regulator for the 54EC capital gain bonds issue to the public/ investors.

Features of 54EC bonds:

54EC capital gain bonds are the fixed income finance instruments which are entitled for the tax exemption u/s 54EC, benefitting the investor.

  • Capital gain bonds are non-transferable as well as non-negotiable bonds.
  • TDS on the investment in capital gain bonds is exempted. The interest earned on these bonds investment is taxed.
  • CG bonds are AAA rated by the rating agencies- ICRA, CRISIL, India Ratings and Research Private Ltd.
  • Minimum tenure for the 54EC capital bonds is 5 years.
  • Minimum Investment is Rs. 10000/-
  • Maximum investment in capital gain bonds allowed is ₹50,00,000 for per financial year
  • Maximum CG bonds buying limit is 500 bonds. Each bond at ₹10000.
  • The lock-in period will be 5 years with effect from April 1, 2019.
  • Annual interest rate at 5.25%
  • Available in Physical as well as demat form

Benefits of Investment in Capital gain bonds:

  • Safety: All the 54EC bonds are issued by the public sector companies. In these bonds, Government of India is the major stakeholder. This eliminates/dilutes the risk of interest- ensuring on time payments to the bond investors.
  • Liquidity: Because the capital gain bonds are non-transferrable and are for fixed tenure of 5 years, the liquidity option is unavailable on the cg bond investment
  • Returns: Capital gain bond interest rate is 5% and it is the fixed income instrument to exempt the long term capital gain tax. The TDS on the bond investment is exempted. Only the tax over interest earned on the total bond investment is levied to the investor.

Tax exemption u/s 54EC:

To enjoy the tax exemption benefits from the LTCG, there are certain conditions to meet by the investor u/s 54EC:

  • The investment amount should be derived from the capital gains from the sale of property.
  • Capital gain bond investment is limited up to ₹50,00,000. If the capital gain is share by the real estate business partners then each partner is entitled to the maximum investment limit ₹50,00,000.
  • To make investment in capital gain bonds (PFC, REC, NHAI or IRFC) it is necessary to invest in it within the 6 months from the date of the property sale or before filing their IT returns.

Government notifies the Bonds eligible for Capital Gain Bond (54EC) investment, current list is as follows

Start Investing in Capital Gain Bonds

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FAQs on Capital gain bonds in India:

1. Can I redeem the REC/NHAI bonds before the lock-in period i.e. 5 years after the investment?

No, you cannot redeem before the maturity of bonds.

2. If I want to invest more than ₹50,00,000 in any Capital gain bonds, is it possible?

No, you cannot invest more than ₹50,00,000 in the capital bonds. According to the Finance Act (no.2) 2014 amendment you are not allowed to make the investment in capital gain bonds more than ₹50,00,000. Although to make more than ₹50,00,000, you can consider investment under section 54F or 54.

3. Can I borrow loans against investment in Capital gain bonds?

Yes, you can borrow loan based on the asset security; although you will not be able to enjoy the benefits of the tax exemption u/s 54EC. The income earned from the long term capital gain (LTCG) will be taxable from the year you have borrowed loan.