The section 54EC of the Income-tax Act, 1961 allows a deduction in respect of long term capital gains arising from sell/transfer of any long term capital asset (for example, any immovable property, jewellery or shares) which was held for a period exceeding three years. In case of shares, the holding period should be 1 year. This section is specifically for the investment in some bonds which are meant for people who have made some long term capital gains, and would like to save taxes out of such gain.
Let’s see the salient features of 54EC Bonds
1. Investment into these bonds save long term capital gains
2. It is locked in for 3 years
3. Demat account is not compulsory to invest in these bonds
4. Currently REC and NHAI issue such bonds
5. Rate of interest from these bonds are 6% pa and paid out every year. Now it’s at 5.25% pa w.e.f December 1, 2016
6. TDS on the interest payable will not be deducted
7. Remember the yearly interest earned is taxable under the head of income from other source
8. The maximum cap for the investment is Rs. 50 lacs
9. The Bonds are non-transferable, non-negotiable and cannot be offered as a security for any loan or advance
What you need to know before investing in 54EC Bonds?
The benefit under section 54EC can be availed of only if there is an income from a capital asset, being long-term in nature.
You can invest in such bonds only up to the extent of capital gains and not the sales consideration. Remember the upper limit for investment is up to Rs. 50lacs.
Example; If a property has been held for more than 3 years and sold for Rs. 80 lacs whose indexed value of acquisition is Rs. 35 lacs, thus the long term capital gain is Rs. 45lacs. In this case the maximum investment into 54EC bond can only be Rs. 45 lacs and neither Rs. 50 lacs as given upper limit nor the sale value i.e. Rs. 80 lacs. In other case, if the property would have been sold for Rs. 1 crore having the same indexed value of acquisition i.e. Rs. 35lacs then the maximum amount that can be invested in the said 54EC bond will be Rs. 50 lcas even though the long term capital gains amount is Rs. 65 lacs.
Since the investment into 54EC bond is locked for 3 years, you cannot sell or transfer the bonds. If you do so, the amount of capital gains which were given as exemption will considered to be taxable long term capital gains in the same financial year in which the sell/transfer took place.
Who is issuing 54EC Bonds?
Currently there are two corporations which have been notified by the Government of India as being eligible for issue of these bonds are National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC).
Who can invest in 54EC Bonds?
Any person (including NRI out of NRO account on a non-repatriable basis) and Hindu undivided family (HUF) through its Karta can make investments into these two bonds issued by NHAI and REC. This can also be invested by partnerships, companies, financial institutions, insurance companies, provident funds, superannuation funds, gratuity funds, mutual funds, FIIs, trusts authorized to invest bonds ect.
Where can I buy these Bonds?
Most of the bank branches sell these bonds. For the respective bond application forms you can download either from NHAI or REC website.
You can also talk to your local bank branch for the availability of these bonds or alternatively you can find the list of mobilisors & collecting bank branches in the websites of these issuers.