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Guide for Investment In Capital Gain Bonds

Updated on June 12, 2020
PrateekJain24 profile image

A Financial and management consultant who provides advisory services to their clients regarding managing their business.


1. Introduction

Here, I would like to throw light on a very important subject that is prevailing nowadays which is capital gain bonds. We all have many future plans such as acquiring a house, saving funds or starting a business or industry of our own.

To make these plans successful, we need to create an investment plan. Investing in capital gain bonds can bring great results for an investor in the long term so let us discuss about this in this hub.

2. Features of Capital Gain Bonds

Investment in these bonds allows an exemption under Section 54 EC of the Income Tax Act.

The eligible bonds under Section 54 EC include i.e., Rural Electrification Corporation Limited (REC) and National Highways Authority of India (NHAI), indian railways finance corporation (IRFC), Power grid finance corporation (PFC). Long term capital gains on the profit that person makes when he sells a capital asset, for example, an immovable property, jewelry or shares.

Face value of REC capital gain bond is rupees 10,000/- per bond minimum investment rupees 20,000/- and maximum investment it can be up to 500 bonds of rupees 10,000/- each in a financial year. Whereas, tax benefits and TDS implications are subject to section 54 EC of income tax act and REC act.

For investment in capital gain bonds, the issues open on 1st April every year and close on 31st March of the corresponding year. The credit rating for Rural Electrification Corporation Limited capital gain bonds provided by CRISIL is AAA that represent stable risk.

3. Bonds Available for Claiming Exemption

  • Rural Electrification Corporation Limited (REC)
  • National Highway Authority of India (NHAI)
  • Indian Railway Financial Corporation (IRFC)
  • Power Grid Financial Corporation Limited (PFC)

4. Utilizing Idle Funds

Time taken between accumulating funds and starting any business or acquiring land and building may have some gaps. While the funds are not invested into the acquisition or capital purchase, it is available in liquid form for a longer term which attracts tax implications. Otherwise, any wrong investment of these funds may cause a high tax liability.

Therefore, to preserve funds for the desired purpose without paying a substantial duty even using them to generate some interest income, here is a suggestion every individual or firm can use and the scheme is to invest in capital gain bonds introduced by Government of India.

5. Illustration

  • I met a person Mr Sharma, who has just sold his land located in Uttar Pradesh state for an amount of 50 lakhs in the year 2019. Now he wishes to utilize the money received from the sales proceeds for acquiring land near Madhya Pradesh where his family relocated. He will utilise their funds after three years for acquiring new land.
  • Until the time Mr Sharma does not have requirements of funds in liquid form or is willing to invest somewhere, he can save his tax implications on the amount accumulated out of sales proceeds of a capital asset and also he will get some interest income from the funds until the funds are utilized for a specific purpose.
  • Hence I advised him for investing in such bonds which are according to their needs like investment in capital gain bonds scheme for a period of three years where he will also get interest in return at a fixed percentage.

6. Income Tax Guidelines Regarding Bonds

Income tax offers various guidelines for investing in capital gain bonds. Many financial experts and professionals such as chartered accountants, lawyers and other institutions advise their customers to invest in these schemes.

People invest in these schemes to avoid duty implications and also providing finances to Government of India so they can use these finances for development purpose. Within the domain of Section 54 of the Income Tax Act 1961, the capital gain bonds are being issued as long-term specified assets. Benefit under Section 54 can be availed by buying these bonds only when their is an income from sale of capital asset.

7. Characteristics of Capital Gain Bonds

Below are some important characteristics of capital gain bonds succeeding in India.

  1. Capital Gain bonds lock-in period is 5 years from deemed date of allotment.
  2. Coupon percent per annum/interest rate/payable at 5.75% per annum payable on 30th June every year, interest payment is made by NEFT, at par cheque and demand draft.
  3. Interest on application money accumulate at the prevalent coupon rate from the date of realisation of application amount by the mode of cheque, demand draft, NEFT and RTGS.
  4. These capital gain bond discussed above are for individual and legal entity residing and operating in India however NRI can also invest in these bonds to take advantage of these schemes.

8. Documentation

There are some necessary documents which you need to provide along with the application form while applying for capital gain bonds.

  1. Pan card and address proof photocopy self-attested by the applicant.
  2. Cancelled cheque copy for ECS, RTGS, NEFT payment of interest maturity.
  3. The cheques and DD should be drawn in favour of scheme name in which one is making an investment, such as “Rural electrification corporation limited 54 EC bonds” in case of investment in REC capital gain bonds.

9. Should You Invest In Capital Gain Bonds?

It is evident that how much investor needs to generate from other investments, to compare it with the bond investments.

The desired ROI may not look that difficult to achieve, but since the shares and mutual funds are not fixed return instruments and are market-linked products, so there is considerable risk involved in the complete transaction.

If one is comfortable with the volatility and agrees to accept the inherent risk, then one may go with the investment options which attracts high tax liability, else capital gain bonds will be suitable. Moreover, investing always should commensurate with your goal requirements and tax planning should be part of your holistic financial plan.

10. Conclusion

Capital gain bonds come with zero risks of repayment and interest. Your annual income from interest earned on these bonds is guaranteed by the government of India. If you are selling your property and are looking for ways to avoid having to pay taxes, look no further than the 54EC bonds as a financial solution.

Sometimes it is desirable to take the risk if the fund is to be invested for a very long-term horizon. Whereas, it is not advisable to accept such risks if the goal is nearby and you have not enough money for that goal. So, one has to decide accordingly.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2019 Prateek Jain


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