Sign up with Google
54 EC Bonds
The next type of investment that we will discuss is a fixed income instrument that provides capital gains tax exemption under section 54EC to the investors and hence the name 54EC Bonds.
It grants the investor an exemption from the long-term capital gains (LTCG) tax arising as a result from the sale of land, building, or both. The tenure of these bonds is 5 years. One needs to buy a minimum 1 bond priced at ₹10000. The Face Value of each bond is ₹10000. One can buy a maximum of 500 bonds of ₹10000 each in a financial year. This is a totally illiquid bond as it has a lock-in period of 5 years.
How to buy 54 EC Bonds
These bonds are issued by NHAI, REC and PFC. These bonds can be bought directly from the issuers. Some banks are authorised to sell these bonds. One can also buy these bonds from the banks. To buy this bond, one needs to fill the application form first. A Copy of PAN Card along with some identity proof needs to be provided as well. These bonds can be held either in physical form or in demat form.
Interest Rate Mechanism
The interest rate is 5.25% payable annually on March 31 every year. This interest rate may vary across different bond issuers.
Tax Implications
To claim tax exemption with 54 EC bonds, the following conditions should be satisfied:
- A long-term specified capital asset, i.e., land or building held by the assessee for more than two years.
- The amount invested in 54EC bonds needs to only be to the extent of the capital gains on the asset and not net consideration received on the sale of the long-term capital asset.
- The amount exempted from tax under this section is the amount of capital gain or the amount invested in capital gain bond, whichever is lower, up to a maximum of ₹50 lakh.
- The capital gain should be invested in the capital-gain bond within six months from the date of transfer or sale of the specified capital asset.
- The interest income from 54EC bonds is added to one’s total income and taxed as per the tax slab applicable.
Risk associated with 54 EC Bonds
There is no risk involved as these bonds are backed by the Government of India. Principal and Interest are guaranteed. If inflation turns out to be higher than the nominal interest rate of the Bond, there would be no real returns available. Hence, it is not inflation protected.
