Capital gain bonds are a popular choice when it comes to investment prospects. They offer steady returns and certain tax benefits. As with any investment, it is important to compare Interest Rate on Capital Gain Bonds against other options to determine if it is a good investment.
What are Capital Gains bonds?
Section 54EC Bonds, also known as capital gain bonds are fixed income investment options which offer investors tax exemptions for capital gains. These bonds allow investors to reduce their long-term capital gain tax liability from the sale of real estate. Tax deductions are available for bonds issued by certain entities, such as REC and PFC.
Investors are called creditors or debt holders of the issuer. This is typically a government-backed company that provides infrastructure. These bonds cannot be traded like listed shares on the stock market, but are still popular because they can be redeemed prior to maturity, provided they meet the minimum holding period.
These bonds are also a good choice for tax savings, even though their interest rates can range from 5 to 6 percent.
What Are the Benefits and Features of Investing In Capital Gain Bonds
It is important that you understand the characteristics of capital gain bonds and how they will help you achieve your financial goals. Here is a summary of the benefits and features that capital gain bonds offer.
- The minimum investment in 54EC bonds in an annual financial period is Rs10,000. The maximum investment is Rs50 lakh.
- These bonds are available online and off. Investors can choose to store them in their Demat accounts or physically.
- To be eligible for the capital gains tax exemption, investors must hold the bond for at least five years after the date of acquisition (or for bonds issued before or after April 1, 2018 the date of purchase). If the entire amount is redeemed prior to this date, long-term gains tax will apply.
- Section 80C (Income Tax Act) does not allow deductions for capital gain bonds.
- Investors could also receive a steady 5.25% interest income. This is an annual interest payment.
- Capital Gain Bonds can be considered a safe investment because they are backed by the government and have excellent credit ratings. These bonds offer fixed interest rates, and can be used to reduce capital gain tax obligations.
- Only the amount of money spent on 54EC bond is deductible. Section 54EC of Income Tax Act allows for an exemption on only 54EC bonds if you channel Rs35 lakh in capital asset gains after realising Rs40 lakh. The remaining Rs5 lakh will be taxed as long-term gains.
- Capital gain bonds are the highest credit-rated bonds and are owned and guaranteed by the government. This reduces the risk of defaulting and ensures security for investments.
What is the process of investing in capital gain bonds?
Understanding is important, but you also need to know how to calculate the long-term capital gain. These instructions will explain how to calculate long-term or capital gains from bonds.
- It is important to first assess the total value of these bonds.
- Deducting all charges, including ownership transfer fees and indexed purchase costs as well as enhanced indexed costs from the total value is important.
- The sections 54,54EC,54F,and 54B also exclude the total after Step 2.
- The final amount represents the capital gains over the long-term.
Should you invest in capital gain bonds in 2024?
Comparing a 5.25% return yearly (pre-tax), it may appear low compared to equity funds. The typical flexicap fund generated returns by using over 20% of the SIPs over the past five years.
If you invested Rs 40 lakh into a flexible-cap fund and spread it evenly over five years, for example, the investment could have grown to Rs 70 lakh. Remember that three years are usually enough time to spread investments.
The Rs 50 lakh that was invested in bonds for capital gains, on the other hand would have grown to at most Rs 63 lakh. It makes mathematical and logical sense to pay taxes up front and invest money in equity mutual funds first.
There’s also a complication when you pay 10 lakh rupees in taxes upfront in the hope of higher equity returns. Equity investments can be volatile and have no guarantees, even though the returns are usually higher over a five- to seven-year period. Capital gain bonds on the otherhand, provide guaranteed returns.
A comparative study also shows that equity funds are taxed at Rs 10 lakh, which is why capital gain bonds can be used to avoid this tax. Capital gain bonds are a good choice for investing in fixed income over a 5-year period, as they offer a return of almost 10% per year, even after taking into consideration the tax benefits.
You can easily say that you can invest in capital gains bonds by 2024.
What are the tax exemption rules on capital gain bonds?
Capital Gains under Section 54EC will not be taxed if the gains are invested by a taxpayer in “long-term specified assets” within a period of six months after they have sold long-term assets, such as stocks and real estate. Long-term specified assets include government-issued securities and bonds, including those issued by the National Highways Authority of India and the Rural Electrification Corporation.
The total amount of money invested in these bonds can’t exceed Rs. 50 lakhs. If your capital gains exceed this limit, it may be better to build a house under Sections54 or 54F than buy bonds under Section54EC. You will be required to pay LTCG on excess capital gains if you do not select any of the options.
The holding period of bonds bought with capital gains must be at least five years. The Section 54EC exemption is nullified if they are sold prematurely, exposing initial capital gains and LTCG liabilities.
Capital gain bonds are a good way to defer or reduce tax liabilities resulting from long-term gains. They can also be an effective strategy to reduce capital gains tax liabilities.
How to Invest In Capital Gain Bonds
capital gains bonds do not trade on the Indian Stock Exchange and therefore cannot be purchased through traditional stock market channels. Direct buyers are the only way to acquire these capital gain bond interest rates less.
A tax-saving opportunity exists when you purchase capital gains bonds from entities such as NHAI REC Indian Railway Finance Corporation, Power Finance Corporation, and Indian Railway Finance Corporation.
You can invest in bonds after you’ve acquired them.
Step 1. Get the bond forms. These include those issued by entities like the Indian Railway Finance Corporation or Power Finance Corporation.
Step 2. Select the direct download option from the webpage.
Step – Select the number of records to be downloaded.
Step 4 Complete captcha verification to begin the download process.
Step 5 Make sure your device has a PDF viewer, as most documents are provided in PDF format.
Step 6 – Open and extract the downloaded forms
Step 7 Fill in the forms as instructed.
Step 8 To pay by traditional means, you can submit a demand draft (DD) or a cheque payable to the account holder along with all required documents in designated collection banks. Alternatively, you can use NEFT and RTGS to pay for your application. You will need to indicate the UTR on the form.
What Are the Limitations to Investing in Capital Gain Bonds
Capital Gain Bond Investments are attractive, but they have restrictions. Buyers should be aware. These bonds are usually of a short duration and may be difficult to sell on the secondary markets. This could cause liquidity issues. These bonds’ interest rate could also change, and be affected by changes to the economy.
Who Should Consider Investing In Capital Gain Bonds
Capital gain bonds are a good investment if you’ve recently made profits on investments, but want to delay tax obligations. They also offer tax advantages and a predictable return on investment. These bonds are a good investment for investors who place a high priority on security.
Final words
Capital gains bonds are a great option for investors who want to get consistent returns with tax benefits. Before making any investment decision, you should assess the current market conditions and your personal investment goals. By consulting with a specialist and doing thorough research, investors can make informed decisions that are in line with their financial goals in 2024.
