Two bonds open; save capital gains tax

Two bonds open; save capital gains tax

The profit on the piece of real estate you sold last month makes a nice fat bulge in the savings account. You find yourself just logging in to your online banking account to see the number of zeros and scrolling to the SMS that pinged once the money got credited to your account. But the call from your financial planner telling you that you’ll lose 20% of that to tax is that niggle in the corner of your joy spreading its darkness around. But wait. There is a way to erase this little patch of unhappiness as well. You can use a legal shelter to save tax due on long-term (at least three years) profit of up to 50 lakh on real estate. Sell smartly and this number can double. Read on to know more.

The difference between the price at which you buy and the price at which you sell is the profit. If you held the property for less than three years, the profit gets added to your income, but hold on for three years and you pay 20% as long-term capital gains (LTCG). But even this can be saved by investing in bonds specified under section 54 EC of the Income-tax Act.

Also See Double Benefit (PDF)

Says Gautam Nayak, a Mumbai-based chartered account, “There are two bonds that are currently eligible under section 54EC. They are bonds from Rural Electrification Corp. Ltd (REC) and National Highways Authority of India (NHAI)."

To get the benefit of investing in these bonds, the property you have needs to be residential, flat or independent house, and has to be held for a minimum of three years to qualify for LTCG.

Bond details

Who can invest? Apart from resident individual, Hindu Undivided Families and non-resident Indians and approved institutions can also invest in these bonds.

Availability: These bonds are available on till 31 March. The issuers of the bond have the right to close the issue any time before this date. Says S.K. Chauhan, manager (finance and account), NHAI, “These bonds are available on private placement and are currently open to retail investors. The instrument is not listed." You can hold these bonds in both demat and physical forms.

Where to buy? You can download the forms from and or get them from authorized banks. You will need to deposit the forms along with required documents and funds at any authorized bank across the country.

Chauhan says, “NHAI bonds application forms can be deposited at any branch of Union Bank of India and IDBI Bank Ltd, and select branches of other authorized banks." For instance, select branches of HDFC Bank Ltd accept the application for bonds of both REC and NHAI.

Tenor and redemption: Both the bonds are available for three years. A senior officer of REC, who did not want to be identified as he is not permitted to speak to the media, says, “With REC bonds, the redemption will happen at par (you get what you invest) at the end of three years from the date of allotment and these are non-transferrable bonds. Also, once you submit the application, you cannot withdraw."

The NHAI bond, too, is fully redeemed at par on maturity of three years. These bonds are not only non-transferrable and non-negotiable, you can’t keep them as security against any loan or advance.

Interest rates: Currently, both the bonds are giving an interest rate (coupon rate) of 6%, payable annually. NHAI bonds will pay the interest on 31 March every year. In case of REC, the interest will be paid on 30 June every year.

Investment amount: You can invest a minimum of 10,000 and a maximum of 50 lakh. The face value is 10,000 per bond and you can buy up to 500 bonds.

Allotment: “The allotment happens on the last date of each month in which the subscription amount is realized and credited into the institutes account," says Chauhan. But it would take around 45 days for the bond to reach you through post.

Tax: The good thing about these bonds is that no tax is deductible at source on the interest they pay. But the interest earned on these bonds is taxable. You will need to pay tax on the interest income.

Other details: You can hold them in the name of a single holder as well as on joint basis. In case you make separate applications, individually or jointly, the aggregate investment should not exceed 50 lakh, or both of you may lose the benefit under section 54 EC.

The bonds also offers a nomination facility. In case of death of one of the joint holders, the name of the deceased holder can be deleted from the bond. Also, transmission of bonds to legal heirs is permitted in case of the death of the holder.

Tax exemption

Exemption under section 54 EC can be claimed only if you have made capital gains. Says Sachin Vasudeva, senior partner, SC Vasudeva and Co. Chartered Accountants, “Investment under section 54 EC is permissible only in case of LTCG. As per the said section, the capital gains have to be invested in the bonds and the deduction its allowed to the extent of the amount invested."

Therefore, if you’ve made LTCG of, say, 30 lakh and invested it, the amount will be exempt from tax. But if you invest only a part, say 10 lakh, you will get an exemption only on 10 lakh; you will have to pay LTCG tax on the remaining 20 lakh.

However, to avail the exemption, the investment needs to be made within a specified period from the date of gains. “The investment has to be made within six months of occurrence of LTCG in order to be eligible to claim the exemption benefit under section 54 EC," says Nayak.

Though you can invest a maximum of 50 lakh and that too within six months of the transfer of the asset, you can increase your benefit if your LTCG exceeds 50 lakh, the maximum investible permitted. “Say your LTCG of 1 crore arises in the month of January, you can invest the maximum amount of 50 lakh up to 31 March and can invest the remaining 50 lakh in April, since the limit is for investment per year, and not exemption per year."

This is applicable, if your six-month limit falls in between two fiscal years. So if you manage to sell your property after October any year, you can actually double your tax benefit.

Who should invest

If you sell a property and you do not need the funds for three years, these bonds work for you as they help you save tax.

Says Vasudeva, “The rate of tax on capital gains is 20%." This means that 20% of the LTCG has to be paid as income tax. For instance, on an LTCG of 1 crore, your tax liability comes to 20 lakh.

Says Nayak, “When you invest in these bonds, you straightaway get a benefit of 20% as tax exemption." By investing 50 lakh in one fiscal year, you can save 10 lakh—as tax exemption—since this is the amount you would have paid as tax if you did not invest in these bonds.

Therefore, in a way, you are investing only 40 lakh. On maturity, you get back your principal of 50 lakh on maturity (an effective appreciation of 10 lakh in three years since you didn’t pay tax) and also earn an interest of 6% per annum.

Nayak says, “With these bonds, the risk is minimum. You don’t need to track them on a regular basis either nor do you need to pay any kind of brokerage. It’s a good investment avenue to save tax on LTCG especially for anyone who is risk averse."

So if you have made long-term capital gains, now is the time to invest and save tax. Remember, the issuer can close the bond issue before the last date.

Graphic by Ahmed Raza Khan/Mint