54EC Bonds
Sale of a Long-Term Capital Asset results in Long Term Capital Gains tax (LTCG) in the hands of the seller. Long-term capital gains (LTCG) are taxable under the Income Tax Act. Section 54EC allows you to claim exemption from LTCG tax on purchase of notified government bonds up to a maximum of ₹50 Lacs in a financial year.
Eligibility for 54EC Bonds
Sale of a Long-Term Capital Asset results in Long Term Capital Gains tax (LTCG) in the hands of the seller. Long-term capital gains (LTCG) are taxable under the Income Tax Act. However, you can get exemption on LTCG tax under Sections 54, 54F and 54EC. While the Sections 54 and 54F pertain to purchasing a house with the capital gains made, Section 54EC allows you to claim exemption from LTCG tax on purchase of notified government bonds.
Exemption Under Section 54EC
Section 54EC states that if the profit made on sale of a long-term capital asset – whether an immovable property or shares and stocks – is invested by the taxpayer in ‘long-term specified assets’ within 6 months of the sale, then the capital gains are exempt from taxation. The ‘long-term specified asset’ currently eligible are Bonds (popularly known as 54EC Bonds) issued by the following entities:
- REC (Rural Electrification Corporation Ltd)
- PFC (Power Finance Corporation Ltd)
- NHAI (National Highways Authority of India)
- IRFC (Indian Railways Finance Corporation Limited)
Features of 54EC Bonds
- Credit Rating - All the 54 EC Bonds are AAA rated and backed by the government, hence the risk factor associated with buying 54EC bonds is mitigated.
- Time Period Restriction – The investment needs to be made within 6 months from the date of sale of the Long-Term Capital Asset.
- Minimum Application Size – 1 (one) bond of ₹10,000/- (may vary depending on the issuer)
- Maximum Application Size – 500 (five hundred) bonds of ₹10,000/- each amounting to maximum of ₹50 Lacs in a Financial Year.
- Tenure – Lock-in of 5 years and these are non-transferable.
- Mode of Holding- 54EC Bonds can be held in either demat or physical form. These bonds are not listed on any stock exchange.
- Interest rate – 5% payable annually (As of August 2020).
- Mode of Investment – Via Physical Forms along with Cheque/DD.
At Richfield Fintech we can help you save taxes by sourcing these slightly inaccessible bonds. Connect with us for more details.
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