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Capital Gain Bonds – Features and how to invest

Capital gain bonds are one of the best investment avenues for securing long-term tax exemptions. In other words, you can avoid taxation on the profit of selling capital assets by investing those profits into specific assets or bonds. This tax exemption is also known as capital gains exemption. 

In this blog, we will discuss various aspects of this investment avenue and ways to benefit from it. 

What are Capital Gain Bonds? 

When an individual sells immovable assets like real estate, he/she incurs a tax liability on the profit. The individual can avoid such tax deductions by investing in capital gain bonds. These bonds are financial instruments issued by public sector companies or other government-backed entities. 

Capital gain bonds, also known as Section 54EC bonds, are fascinating investment options as investors can save on long-term capital gains tax and contribute to the nation’s development simultaneously. 

To avail the benefits one has to invest in these bonds within a specific period (specified by the Finance Act of the financial year) after selling the capital asset. 

Bonds Eligible Under Section 54EC 

Here is the list of capital gain bonds that the government has mentioned specifically to be bonds eligible Under Section 54EC. These bonds have a 5-year fixed maturity period. Investors can redeem them after the lock-in period is over. 

These bonds are issued by: 

  1. Power Finance Corporation Limited (PFC) 
  2. Indian Railways Finance Corporation Limited (IRFC) 
  3. Rural Electrification Corporation (REC)
  4. National Highways Authority of India (NHAI) 

Capital Gain Bonds by IRFC, NHAI, PFC, and REC

PFC, IRFC, REC, and NHAI issue bonds that are specified under Section 54EC. 

Here are the key features of these bonds: 

  1. These bonds hold an AAA rating, for being a highly stable and secured investment option. 
  2. These 54EC bonds offer an interest rate of 5% p.a., which is subject to income tax as per the applicable individual tax slabs. 
  3. You can buy these bonds either in demat format or physically. 
  4. The capital gain bonds are not traded via stock exchange listings. 
  5. With a self-certified address proof copy, self-attested PAN card copy, and a cancelled cheque you can buy these bonds. 

How to Invest in Capital Gain Bonds? 

To invest in 54EC bonds you can follow the simple steps below: 

  • Step 1: Visit the websites for the respective bonds (PFC, IRFC, REC, and NHAI) and click on the ‘Direct’ option. 
  • Step 2: Specify the number of bonds you want to download. You have to enter a captcha code to download the form. 
  • Step 3: Print the form out and fill it with the necessary details. 
  • Step 4: Submit the form at the designated bank by attaching a demand draft or an account payee cheque. 

Banks like the State Bank of India, IndusInd Bank, HDFC Bank, IDBI Bank, and Axis Bank can process the request.  

Benefits of Investing in 54EC Bonds 

Apart from being a highly stable and secure wealth-generating instrument, 54EC bonds have several other intriguing benefits. 

  1. Investors get to hold the bond in demat and physical formats. 
  2. It provides tax benefits by providing an exemption from long-term capital gain tax under Section 54EC of the Income Tax Act, 1961. 
  3. The income that an investor will generate from the interest is taxable but with no TDS (Tax Deduction at Source). 

Features of Capital Gain Bonds 

Here are some of the key features of the Capital gain bonds

Issue Details On-Going 
Tenure 5 Years 
Rate of Interest 5.00% p.a. payable annually 
Mode of Holding Physical or demat 
Redemption Automatic redemption after 5 years 
Taxation Interest is taxable but with no TDS 
Rating AAA
Minimum Investment 1 Bond (₹10,000) 
Maximum Investment 500 Bonds (₹50,00,000) 

Conclusion 

With ‘AAA’ credit rating issued by reputed PSUs, capital gain bonds can ensure the highest safety in the market while supporting national development. Investors should consider individual factors like liquidity requirements, financial goals, and risk appetite before investing in these bonds that offer considerable tax benefits.    

FAQs

What is the interest rate on capital gain bonds in 2023?

The interest rate on capital gain bonds has increased to 5.25% per annum, starting from April 1st, 2023.   

Are there any interest payouts during the lock-in period? 

Yes, investors can get annual payouts from 54EC capital gain bonds. The date of interest payment is fixed but it varies from issuer to issuer. For PFC the date is July 31st, for IRFC it is October 15th, for NHAI it is April 1st, and for REC it is June 30th every year.  

Which banks are authorised for capital gain bonds?

The banks that are authorised to deal with capital gain bonds are HDFC Bank, IndusInd Bank, Yes Bank, ICICI Bank, Canara Bank, Kotak Mahindra Bank, Axis Bank, IDBI Bank, Union Bank of India, and State Bank of India.  

Are capital gain bonds taxable after maturity?

The interest is fully taxable. However, the principal amount is tax-free at maturity. 

Who is eligible to invest in 54EC Capital gain bonds? 

Indian Residents, Non-resident Indians (NRIs), Companies, Hindu Undivided Families, Firms, Banks, Co-operatives, Commercial RRBs, and Financial Institutions can invest in these bonds. 

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