Capital Gain Bonds Meaning, Types, and Benefits

Key Highlights

• Capital gain bonds are fixed-income investments that provide capital gain tax exemptions to investors under section 54EC.

• The different kinds of capital gain bonds are REC Bonds, NHAI Bonds, PFC Bonds and IRFC Bonds.

Most people are aware of the benefits one can get from selling property. But how can they be an excellent investment, and what exactly are they called? If you want to learn about the 54 EC bond, read along.

What are capital gain bonds?

Capital gain bonds or commonly known as 54 EC bonds are fixed-income investments that provide capital gain tax exemptions to investors under section 54EC. Investors who purchase these bonds can reduce their tax liabilities on the long-term capital gains from the sale of immovable property.

The owners of these bonds are known as the debtholders or the creditor of the issuer. Infrastructure companies that the government backs are only eligible to issue these bonds. Since capital gain bonds are easily redeemable before maturity, it is among the favorites. The only drawback, however, is you can sell these bonds on the stock exchange since they are outside the listed shares. In addition, capital gain bonds are taxable, with an interest rate of around 5 to 6%.

What are the different types of capital gain bonds?

The different kinds of capital gain bonds are listed below. Section 54EC of the Indian Income Tax Act also permits tax exemption for these bonds.

1. REC Bonds: Rural Electrification Corporation Limited

2. NHAI Bonds: National Highway Authority of India

3. PFC Bonds: Power Finance Corporation Limited

4. IRFC Bonds: Indian Railway Finance Corporation Limited

How to avail tax benefits on capital gain bonds?

Here are the tax benefits of investing in these bonds and the ways by which you can avail of the exemption

1. To avail of the exemption, the person must make the exemption within six months of selling their immovable property.

2. As of effective 2024, you can redeem such investments after five years rather than three years, according to the previous law. Therefore, these bonds' lock-in period tax exemption eligibility is five years.

3. The exemptions only apply for long-term capital gains on selling immovable property like buildings or land.

4. The maximum amount one can avail as the tax exemption under these bonds is Rs. 50 lakhs.

How to invest in capital gain bonds/54 EC bonds?

Since capital gain bonds do not list on the Indian Stock Exchange, you cannot buy them through the stock market. Therefore, the only way of purchasing these bonds is through direct buyers, either in a Demat or physical form.

Once the bonds are purchased, follow the below steps to invest in them:

1. Download the respective bond form, such as REC bond form, NHAI bond form, PFC bond form, or IRFC bond form.

2. Now click on the direct option on the download page.

3. You will now have to select the number of records you need to download.

4. Enter the shown captcha and click on download.

5. Remember, download the documents in PDF format, so ensure your device has a PDF reader.

6. Unzip and extract the forms.

7. You can print and fill out the form according to the instructions.

8. You must attach a demand draft or account payee cheque and necessary enclosures at the collection banks' designated branches. Or you can pay using NEFT or RTGS facility and mention the UTR no at the space provided in the application form.

How do capital gain bonds work?

While understanding capital gain is one parameter, understanding how it works or how to calculate them is also vital. The below pointers will help you understand the calculation of the long-term capital gains or the capital gain bonds:

1. Firstly, estimation of the total value for these bonds.

2. All expenses, such as transfer of ownership, cost of indexed acquisition, and indexed cost of improvement, will be deducted from the total value consideration amount.

3. There will be deductions of all the exemptions provided by sections 54, 54EC, 54F, and 54B from the amount received after step 2.

4. Now the final amount will be the long-term capital gain.

Know about Shares and Derivatives

Conclusion

People should not be worried about selling their property and paying taxes on the gains because now it can be exempted under long-term capital gains or capital gain bonds. Capital gain bonds come with zero risk, and the annual income from the interest earned is guaranteed per the Indian Income Tax Act.