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Save capital gains tax with 54EC Bonds

Save capital gains tax with 54EC Bonds

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Save tax with 54EC bonds - Capital Gain Tax on Property Sale

What do you do when you want to avoid paying taxes on the capital gains you make from the sale of a property {you held for more than 3 years}? Simple, you invest in 54EC Bonds.

According to Section 54 EC of Income Tax, 1961 an investor is allowed a deduction in respect of long-term capital gains arising on the sale of any long-term capital asset if the amounts of capital gains are invested in bonds specified under section 54EC of the Income-tax Act within six months from the date of transfer of the asset.

To claim the exemption under section 54EC, you need to re-invest the sale proceeds from the sale of house property into 54EC Capital Gain Bonds. You can invest up to ₹50,00,000 in the bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) within a period of 6 months and before the tax filing deadline.

Currently, Rural Electrification Corporation Limited (REC), Power Finance Corporation Ltd (PFC ) , National Highways Authority of India (NHAI) and Indian Railways Finance Corporation Limited (IRFC) are permitted to issue capital gains bonds under Section 54EC.

A quick snapshot of the features of ongoing 54EC bonds:

REC NHAI
Coupon/Interest rate/Yield*  5% p.a.  5% p.a.
Rating  AAA / Stable (CRISIL)  AAA / Stable (CRISIL)
Tax Status  Interest is Taxable  Interest is Taxable
Tax Benefit  SEC 54 EC  SEC 54 EC
Minimum ₹10,000 ₹10,000
Maximum ₹50 lacs in an FY ₹50 lacs in an FY
Tenor  5 Years  5 Years
Interest Date  30th June  1st April
Put/Call/Premature Encashment  Bullet repayment at the time of Maturity  Bullet repayment at the time of Maturity
Mode Of Interest  Annual  Annual
* The yield on these bonds is revised every financial year by the bond issuer. The yield specified here is valid for FY2022 and may be revised.

FAQs on investing in 54EC Bonds

1. Why invest in 54EC Bonds? 
To save tax on Capital Gains.  If you make long-term capital gains (LTCG) by selling a property you held for three years, you have to pay a 20% tax. One way to avoid paying this tax is by investing in bonds specified under section 54EC of the Income-tax Act. So you invest your LTCG here, you don’t need to pay that 20% tax. An investor has to invest in these bonds within six months of the occurrence of Capital Gains to avail of the tax benefit.

2. Who can invest?
Resident Indians, HUF, non-resident Indians and approved institutions can invest in these bonds.

3. What is the interest earned in these bonds?
The interest on these bonds is revised every year by the bond issuer. For the financial year 2022, the interest offered in 54EC bonds is 56% p.a.

4. What is the lock-in period or tenor for 54EC bonds?
The lock-in period is 5 years from the date of allotment in terms of section 54EC of the IT Act, 1961. These bonds can be fully redeemed at maturity, after five years.

5. What is the minimum and maximum investment amount in 54EC bonds?
You can invest a minimum of Rs10,000 and a maximum of Rs50 lakh of your long-term capital gains, in 54EC Bonds, in a financial year across the two available bonds. The face value of these bonds is Rs 10,000 per bond, so you can buy up to 500 bonds.

6. Where can I buy these bonds?
Arihant Capital Markets Ltd is an official arranger on both REC and NHAI 54EC bonds. Arihant has offices in more than 200 cities with over 850 investment centres. To invest in these bonds, email us at contactus@arihantcapital.com or call 022-68836660

7. Is the interest on these bonds taxable? Whether any TDS is deducted on interest?
You get a tax benefit under Section 54 EC, but the interest earned on these bonds is taxable. You will need to pay tax on the interest income as advance tax. However, no tax is deducted at the source on the interest paid by these bonds.

8. What is the mode of holding these bonds?
54EC bonds can be held in physical as well as Demat form.

9. Can I transfer these bonds to my wife?
You cannot transfer these bonds in another person’s name. 54EC bonds are non-transferable, non-negotiable and cannot be offered as a security for any loan or advance.

10. Can I get a loan against my 54EC bonds?
54EC bonds are a non-negotiable financial instrument. So you cannot get money by keeping the bond as a security against any loan or advance, since this is not permitted.

11. What is the procedure for redemption of bonds??
The redemption process would depend on the mode of bond holding.

  • Against Bonds allotted in Physical form – Surrender duly discharged original Bond Certificate(s) along with request letter.
  • Against Bonds allotted in Demat/Electronic form – Surrender copy of delivery, or
  • Redemption is made automatically at the end of 3rd year from the date of allotment without surrender of bonds.

12. What is the procedure for transmission of bonds to a legal heir?
The legal heir has to produce the following documents:

  • Original bond certificate.
  • Original/attested Copy of Death certificate – English/Hindi version
  • Attested copy of Succession Certificate or Letter of Administration or Probated Will.
  • Notarised Disclaimer Letter on non-judicial stamp paper from the legal heirs in favour of the claimant, if more than one legal heir.
  • Attested copy of photo identification & address proof of legal heir – Passport/Election ID card/Driving License etc. (English/Hindi version).
  • Signature and bank account details of Legal Heir/claimant duly attested by his/her banker with bank seal in the original.
  • Copy of PAN card/Form-60 of Legal Heir/claimant.
  • Request letter signed by the Legal Heir/claimant.

13. What is the procedure for the Issue of the duplicate bond certificate?
The joint holder(s) have to produce the following documents:

  •  Request Letter.
  • Copy of FIR in case of theft.
  • Indemnity Bond executed on non-judicial stamp paper of Rs 100 with notary attestation.
  • Demand Draft for Rs 500 in the name of the concerned Registrar of bond, payable at Delhi for the cost of advertisement.

14. What is the procedure for the Issue of duplicate Interest/Redemption Warrant?
The holder has to produce the following documents:
a. Request Letter.
b. Indemnity Bond executed on non-judicial Stamp Paper of Rs. 100/- with notary attestation.
c. Copy of passbook attested by the banker.
d. Present address and Bank details with supporting documents, if any change.

15. What is the procedure for Change of Address?
In order to incorporate a change in address, the holder(s) have to produce the following documents to the issuer of the bonds:

  • Request letter duly signed by all the holders and attested by the holders’ bank.
  • Attested copies of proof of identity (driving license, passport, PAN card and the like).
  • Attested copies of proof of new residence (front and back pages of the ration card, property agreement, latest electricity/telephone bills, passport and the like).

16. What is the procedure for Change of Bank Account Details?
In order to incorporate a change in bank details, the holder(s) have to produce the following documents to the issuer of the bond:

  • Request Letter duly signed, along with a letter from the banker attesting the security holder’s signature and address.
  • Bank account statement/copy of passbook duly attested by Bank.
  • A leaf of cancelled cheque of the said account.

17. What is the procedure for the transfer of bonds to the nominee’s name?
 The nominee has to produce the following documents for the transfer of bonds:

  • Original bond certificate.
  • Original/attested Copy of Death certificate – English/Hindi version.
  • Attested copy of identity & address proof of Nominee i.e. Passport/Election ID card/Driving License etc.(English/Hindi version).
  • Signature and bank account details of Nominee duly attested by his/her banker with bank seal in original.
  • Copy of passbook attested by banker.
  • Copy of PAN card/Form-60 of Nominee.
  • Request letter signed by the Nominee.

You can also contact your Arihant advisor to help you to make all the above changes.

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