If you have made long-term capital gains (LTCG) from transfer of capital assets like real estate, jewellery and bullion, you can invest in capital gains tax exemption bonds to save taxes. These bonds can only be issued by specified government organisations such as REC Ltd (formerly Rural Electrification Corporation), Power Finance Corporation Ltd (PFC), National Highways Authority of India (NHAI) and Indian Railways Finance Corporation Ltd (IRFC).
Recently, REC, a navratna enterprise of the government, launched REC Capital Gains Tax Exemption Bonds-Series-XVI.
Let’s read more about these bonds and what it offers to you.
What is on offer?
Capital gains tax exemption bonds are commonly also known as Section 54EC bonds, as investment in these bonds allows exemption from LTCG tax under this section of the Income-tax Act, 1961. These bonds are offered to investors who earn LTCGs from land, building or both or from jewellery and bullions and would like tax exemption on these gains.
When should I invest in these bonds?
If you made LTCGs from the transfer of capital assets, make sure you invest in these capital gains bonds within six months from when the capital asset was transferred.
How much can I invest in these 54EC bonds?
The face value of each REC bond is Rs 10,000 and a minimum investment of two bonds valuing Rs 20,000 need to be made. You can invest a maximum of Rs 50 lakh in 54EC bonds in a financial year. However, in case of jointly-held assets like real estate, each owner has a separate limit of up to Rs 50 lakh for investing in these bonds.
In simple words, if you and your spouse sell a house and made a long-term capital gain of, say, Rs 1 crore that was held jointly by the two of you, then each of you can invest Rs 50 lakh in REC bonds and claim a capital gains exemption up to that amount.
These bonds are only meant to save your capital gains tax. You cannot use these bonds for general investments; for those, there are better-yielding investments.
These bonds come with a lock-in period of five years from the date of allotment and are non-transferable. You cannot even sell them on stock exchanges, because they aren’t listed. Premature redemption is not permitted under any circumstances. However, in case of death of the investor, if there are a joint holder, the bonds can be transferred to the second or third holder. In the absence of joint holders, bonds can be transferred in the name of the nominee.
Since these bonds are meant for a specific purpose (reinvesting capital gains), they are automatically redeemed after their tenure of five years. You don’t even need to surrender your bond certificate. Interest or redemption proceeds are automatically credited in the registered bank account of the investor.
REC 54EC bonds offer an interest rate of 5 percent per annum, payable annually, on June 30 each year, until the date of redemption. Interest earned from 54EC bonds is taxable in the hand of the investor as per the applicable slab rate; however, no tax is deducted at source on interest.
All 54EC bonds carry the highest rating, a AAA rating. Given that these bonds are backed by the government, the risks of interest defaults and capital repayment are largely protected against.
REC has been assigned the highest credit rating for long-term borrowing by domestic credit agencies India Ratings, CRISIL, ICRA and CARE. On an international basis, REC has been given long-term borrowing ratings from Fitch and Moody's that are on a par with sovereign ratings for India. These ratings indicate the likelihood of timely payment of the obligations. For instance; CRISIL has assigned a CRISIL AAA/Stable (pronounced as CRISIL triple A rating with stable outlook) rating to the REC capital gains bonds. Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.