From the plethora of investment and tax saving schemes, bonds investment is increasingly becoming the preferred choice among investors. The main reason being they are less volatile than the standard investment options and provide fixed returns. For the uninitiated, bonds refer to the amount a lender gives to a corporation to assist in their financial requirements in return of fixed cash flows in terms of interest and return of the principal at the end of tenure.
Features of Capital gain bonds or 54 EC bonds:
- 54 EC bonds are tax-saving instruments used to save tax on the sale of fixed assets like property (house or land). The capital gains received after selling these fixed assets are invested further in 54 EC bonds to save tax.
- As per Govt norms, an individual can invest in capital gain bonds for a maximum of 500 bonds amounting to INR 50,00,000.00 in a financial year or as less as one bond amounting to INR 10,000.00.
- Since 54 EC bonds are backed by the government, the financial risk is considerably less.
- Another main reason that capital gain bonds 54EC are preferred is that these are provided by large corporations or government agencies with a AAA credit rating. AAA credit rating is the highest rating that can be assigned by any credit rating agency to any corporation. This credit rating, in any case, mitigates the investor's risk and the chances of bankruptcy or financial loss are nominal.
- Capital Gain Bonds are long-term investments with a lock-in period of at five years. For this tenure, the investor is guaranteed a fixed, tax-free income on an annual basis.
Under Section 54EC of the Income Tax Act, 1961, certain bonds are eligible for tax exemption if they are issued by the Indian Railway Finance Corporation (IRFC), Power Finance Corporation (PFC) or the Rural Electrification Corporation (REC). These bonds are also commonly referred to as "54EC bonds".
The eligibility criteria for 54EC bonds are as follows:
- The bonds must have a minimum tenure of 5 years.
- The investment made in the bonds must be within the capital gains arising from the transfer of a long-term capital asset.
- The investment in the bonds should be made within 6 months of the transfer of the capital asset.
- The maximum amount of investment that can be made in 54EC bonds is Rs. 50 lakhs per financial year.
- The tax exemption under Section 54EC is available only for long-term capital gains (LTCG) tax liability and not for short-term capital gains (STCG) tax liability.
As per government norms, the bonds of the below corporations can be availed:
- REC (Rural Electrification Corporation Ltd),
- PFC (Power Finance Corporation Ltd),
- IRFC (Indian Railways Finance Corporation Limited).
In conclusion, 54EC bonds are a useful investment option for individuals who want to save taxes on their long-term capital gains. By investing in these bonds, taxpayers can defer the payment of capital gains tax for up to five years and earn a fixed rate of interest on their investment.