Capital gain refers to the profit gained after the sale of a capital asset. Capital assets can be land, estate, investments/ mutual funds, vehicles, machinery, gold, jewelry, trademark, patent, or leasehold rights. There are two types of capital gains, if the property is held for less than 24 months it is called “Short-term capital assets” and if the property is held for more than 24 months it is called “long term capital assets”.
Capital gain bonds are also called 54EC bonds. These bonds are issued as “long term specified assets” within the meaning of explanation (b) to sub-section (3) of section 54 EC of the Income Tax Act, 1961. These are the bonds where a person can invest the profit earned from long term capital gain for tax exemption from capital gain tax. However, the investment made in capital gain bonds must be within 6 months from disposing of the asset, and only then a person can claim tax exemption.
Types of Capital Gains
Short-term capital gain is the profit earned by selling the asset within 2 years or less, from the date of purchase.
Long-term capital gain is the profit earned by selling the asset that is held for more than 2 years before they are sold.
When a person sells of his capital asset, he is liable to pay 2 types of taxes – Short term capital gains tax (STCG), long term capital gain tax (LTCG).
STCG is imposed on short-term capital gains.
LTCG is imposed on long-term capital gains.
Illustration: If a person has a property worth Rs. 35 lakhs. The person sells the property for Rs. 50 lakh. In this case, the person gained Rs. 15 lakh. This amount of Rs. 15 lakhs is known as a capital gain.
Features of Capital Gains Bonds:
- Tenure: 5 years
- Rate of Interest:00% p.a. payable annually
- Taxation: Interest is taxable although no TDS is deducted
- Redemption: Automatic Redemption after 5 Years
- Mode of Holding: Physical or Demat
- Min Investment: 1 Bond (Rs. 10,000)
- Max Investment: 500 Bonds (Rs. 50, 00,000 Lacs)
Bases on the Income Tax Act, 1961, a person is accountable to pay tax on such capital gain. But the government on the other hand also provides a tax avoidance scheme. Under section 54 EC of the Income Tax Act, 1961, a person can invest in Capital Gain Bonds or 54 EC bonds and can enjoy the benefit of tax exemption in the future. The asset, however, must be held for a minimum of 2 years. One can only claim a tax deduction if the investment of the profit in a specific bond is made within 6 months from the date of sale of such an asset.
Features of Section 54 EC of the Income Tax Act
- For section 54 EC of Income Tax Act, 1961, a person includes “individuals, Hindu Undivided Families (HUFs), partnership firm, companies, etc.).
- A person can avail of the tax deduction on long-term capital assets but not for equity shares and securities.
- The tax deduction is imposed on whichever is less capital profit or investment amount.
- There is a limit as to how much profit can be invested for tax exemption, i.e., 50 lakh rupees. Each bond worth 10,000 rupees. That means a person cannot buy more than 500 bonds. However, the minimum amount which can be invested is not fixed and varies.
- The investment period is fixed for 5 years, i.e., its lock-in period is 5 years.
- The investment of the capital gain is at 5.25 percent, which is payable annually.
- The interest received from the investment is taxable. However, there is no TDS (Tax Deducted at Source).
- The bond is regarded as a safe and secure method of investment and tax deduction.
- The person cannot transfer his capital gain bonds to someone else, nor can they be negotiated.
- If the long-term capital gain belonged to more than 1 person, all the individuals could individually buy 500 capital gain bonds worth rupees 10,000 each, i.e., they can individually invest 50 lakh rupees in capital gain bonds under section 54 EC.
Major Capital Gain Bonds Eligible under Section 54 EC
- REC (Rural Electrification Corporation) and,
- NHAI (National Highways Authority of India) and,
- PFCL (Power Finance Corporation Limited) and,
- IRFC (Indian Railway Finance Corporation)
Benefits of The Capital Gain Bond are as Follows
- A person has a method to sell the property or any other asset without the fear of paying a considerate amount of taxes.
- Not only does the 54 EC bonds provides a mode of tax deduction, but it also helps in increasing the amount by giving a decent rate of interest, i.e., 5.75 per annum.
- It is user friendly. A person has a choice to either hold the bond in physical format or (DEMAT) dematerialization format, i.e., electronic form. DEMAT provides a secure as well as a speedy mode of financial trade.
- 54 EC bonds ensure the safety of the bonds and investment. Returns are certain as they are supported by the government of India.