Get an exemption on long-term capital gain tax through 54EC Capital Gain Bonds. Here’s everything you need to know! Selling immovable property such as land or a house brings generous profit; especially after a long duration. However, that profit soon attracts capital gain tax.
Thankfully, there’s an easy way to avoid or lower capital gain tax by investing in 54EC bonds. Let’s find out how.
Section 54EC of the IT Act allows taxpayers to avail exemption on the long-term capital gain tax (asset sold after 24 months of purchase). This benefit is only applicable to the capital gains earned through the sale of an immovable property such as land/house/shop. Upon selling the property, taxpayers can reinvest the profit in bonds that fall under section 54EC.
Following bonds are eligible for the exemption on capital gain tax under section 54 EC:
1. Rural Electrification Corporation Limited or REC bonds,
2. National Highway Authority of India or NHAI bonds,
3. Power Finance Corporation Limited or PFC bonds,
4. Indian Railway Finance Corporation Limited or IRFC bonds.
1. Capital Gain bonds are backed by the government under the Income Tax Act 1961. These bonds are AAA-rated and, hence, are safe to invest in.
2. 54EC bonds come with INR, 10,000 face value. Investors can invest a minimum of INR. 20,000 (2 bonds) and a maximum of INR. 50,00,000 (500 bonds) in a financial year.
3. With a 5-year lock-in period, these bonds offer a 5.25% interest rate.
4. There is no TDS on the interest earned on capital gain bonds. However, the interest is taxable as per your tax slab.
Note: To avail tax exemption, you must invest in 54EC bonds within 6 months of the sale of immovable property. Otherwise, the investment will not be eligible for the exemption.
Let’s take an example to understand how to avail exemption on LTCG after selling an immovable property. You are selling your house at 1 crore after 4 years of purchase. You will have to pay long-term capital gain tax on the profit, unless, you buy a 54EC bond within 6 months.
The sale price of the property: 1,00,00,000
Indexed Cost of Acquisition: 70,00,000
Indexed Cost of Improvement: 2,00,000
Capital Gains: 28,00,000
Since the max limit is 50 lakhs, you can invest the entire 28 lakhs of capital gains in 54EC bonds. That will remove your LTCG tax liability. However, if you invest only, say 20 lakhs, you will have to pay LTCG tax on the remaining 8 lakhs.
Note: 54EC bonds have a 5-year lock-in period. If you sell/redeem it before maturity, the capital gain amount for which you claimed exemption will attract LTCG tax in that financial year.
54EC bonds are available to invest for any individuals, Hindu Undivided Families (HUFs), Companies, LLPs, Firms, etc.
How to Invest in 54EC Bonds?
Capital gain bonds are not available on the stock exchange. If you're interested in purchasing 54EC bonds, please contact us. You can choose to buy these bonds in either demat or physical certificate format, depending on your preference. However, the demat format is easier to track. Simply fill out a form, and experts from our team will reach out to assist you with the process.
The 54EC bonds offer a great opportunity to lower your capital gain tax liability. After selling your immovable asset, you can re-invest the capital gains in the 54EC bond within 6 months to benefit from the tax exemption. These bonds are safe and offer a decent 5.25% interest rate.
If you wish to buy bonds, contact VNN Wealth to simplify the purchase procedure.
