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Capital gain bonds or 54EC bonds are the fixed income instruments that provide capital gains tax exemption under section 54EC to the investors. The tax liability on long-term capital gains from sale of immovable property can be reduced by purchasing 54EC bonds.
The owner of the bonds are the debtholders or creditors of the issuer. These bonds are issued by infrastructure companies that are backed by the government. Hence, the risk factor gets mitigated by buying such bonds. The capital gain bonds are redeemable before maturity. One cannot sell these bonds as they are not listed in the stock exchange. The interest is reduced to 5% p.a. from 6% p.a. and are fully taxable in your hands.
Assuming that an immovable property is sold at Rs. 70 lakh after a long term period of 42 months from the date of acquisition. The indexed cost of acquisition is 46 lakh and indexed cost of improvement is Rs. 10 lakh. Calculate the capital gain that is taxable after claiming exemption in below two cases:
i. Rs. 14 lakh invested in REC bonds within 6 months
ii. Rs. 8 lakh invested in NHAI bonds within 6 months
I. Rs. 14 lakh invested in REC bonds within 6 months
Particulars | Amount (Rs.) |
Sale consideration | 70 lakh |
Less: Indexed cost of acquisition | 46 lakh |
Less: Indexed cost of improvement | 10 lakh |
Long-term capital gain | 14 lakh |
Less: Investment in REC bonds | 14 lakh |
Taxable long-term capital gain | Nil |
II. Rs. 8 lakh invested in NHAI bonds within 6 months
Particulars | Amount (Rs.) |
Sale consideration | 70 lakh |
Less: Indexed cost of acquisition | 46 lakh |
Less: Indexed cost of improvement | 10 lakh |
Long-term capital gain | 14 lakh |
Less: Investment in REC bonds | 8 lakh |
Taxable long-term capital gain | 6 lakh |
In case if the capital gain bonds are converted into cash before the period of maturity, then the amount so invested on which tax exemption was claimed, shall be taxable as long-term capital gain in the year of conversion.
For example, in above case if the bonds are redeemed before the maturity date, say in the financial year 2020-21, then Rs. 8 lakh shall be taxable as long-term capital gain in the financial year 2020-21.
These bonds are not listed in the stock exchange. Hence you can buy them by the issuer directly either in a demat form or a physical form. Let us understand how to invest in the above mentioned bonds:
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2018 Amendment to Section 54EC
Capital Gain Exemption
Capital Gain Exemption on Sale of Land