Union Budget may facilitate cheaper funds for IREDA, HUDCO

HUDCO has significant exposure in financing affordable housing.

The Union budget may introduce provisions that will help secure cheaper funds for two key state-run firms, IREDA and HUDCO, aligning with the Modi government’s goals for boosting renewable energy production and affordable housing, a government official said.

“The government has been mulling including the two PSUs – Indian Renewable Energy Development Agency (IREDA) and Housing and Urban Development Corp. Ltd. (HUDCO) – under Section 54EC of the Income Tax Act. Once these PSUs are included under the Section, the investors buying their bonds will be exempted from capital gains tax,” the official said on condition of anonymity. “The interest rates of such bonds are much lower than in the bond market.”

Under Section 54EC of the Income Tax Act, any long-term capital gains (LTCG) arising from the sale of immovable assets such as land and house  are exempt if the money is invested in the PSUs notified under the Section. Bonds of state-run companies such as Rural Electrification Corp. Ltd (REC) and Power Finance Corp. (PFC) are currently eligible for such exemptions.

LTCG on property sales are taxed at 20 percent, leading to significant tax liabilities. However, the exemption under Section 54EC can provide assessees relief from the tax burden. Though the interest on these PSU bonds is lower, it is a popular way for investors to save on taxes.

“The government has been working on getting the same status for IREDA and HUDCO as is currently available to REC and PFC under this Section of the Income Tax Act. 54EC Bonds have an interest rate of 5.25 percent per annum currently while in the bond market, the interest on the PSU bonds is above 8 percent approximately,” the official said.

Under Section 54EC, investments in specified bonds must be made within six months of the sale of immovable property, and the invested amount cannot be redeemed before five years.

“The finance ministry had sought some additional information from IREDA and HUDCO on their inclusion in the Section. However, no amendment is needed in the Income Tax Act; it can be simply notified,” the official said.

In April, the government granted IREDA and HUDCO Navratna status, giving the state-run companies operational autonomy.

"The avenues for investments under section 54EC are limited and people are keen to invest in these and avail of a tax exemption. While it is often indicated that the return for investor on the bonds is very low, the decision is left to the taxpayer whether he prefers to pay capital gains tax or he would like to purchase the bonds. This it will be a win for the government as well for the assessee,"Aarti Raote, Partner, Deloitte India told Moneycontrol.

In its first Cabinet meeting, the Modi 3.0 government approved plans to build 3 crore houses under the Pradhan Mantri Awas Yojana (PMAY). HUDCO has significant exposure in financing affordable housing.

"Incorporating IREDA and HUDCO under Section 54EC of the Income Tax Act will enable them to issue bonds eligible for capital gains tax exemptions. This inclusion can attract more investments, lowering their funding costs. As investors pursue these bonds for tax benefits, IREDA and HUDCO will strengthen their financial capacity to support renewable energy projects and urban development. This aligns with the government's strategy for Amrit Kaal and its broader goals of promoting sustainable infrastructure and economic growth," Shabala Shinde, Partner, Grant Thornton Bharat, told Moneycontrol.

IREDA finances renewable energy projects, including wind, hydro,  bio, solar and technologies for efficiency and conservation. As of May 2024, India’s renewable energy sources, including large hydropower, have a combined installed capacity of 193.57 GW. The government aims to install 500 GW of renewable energy capacity by 2030.

"The idea is to have low cost funds available (in lieu of the tax roll over). Limit for investment in these bonds is Rs 50 lakh for each tax payer," Rohinton Sidhwa, Partner, Deloitte, told Moneycontrol.