Capital Gains Bonds(54 EC-Capital Gain Tax):The section 54 EC-Capital Gain Tax 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, jewelry or shares) which was held for a period exceeding three years. In case of shares, the holding period should be 1 year.

The Investment in these Bonds is to be made within six months from the date of such transfer of capital assets (Land/House Property etc.) for being exempted from Capital Gains Tax under Section 54 EC-Capital Gain Tax of the Income Tax Act, 1961.

Features:

• Investment into these bonds saves long term capital gains.
• It is locked in for 3 years.
• Demat account is not compulsory to invest in these bonds.
• Currently REC and NHAI issue such bonds.
• Rate of interest from these bonds is generally 6% p.a and paid out every year.
• TDS on the interest payable will not be deducted.
• Remember the yearly interest earned is taxable under the head of income from other source.
• The maximum cap for the investment is Rs. 50 lacs.
• The Bonds are non-transferable, non-negotiable and cannot be offered as a security for any loan or advance.
• You can invest in such bonds only up to the extent of capital gains and not the sales consideration.

Example:

• If a property has been held for more than 3 years, whose indexed value of acquisition /purchase price is Rs. 35 lacs.
• Now it is sold for Rs. 80 lacs.
• Thus the long term capital gain is Rs. 45lacs (i.e. Rs.80Lac – Rs.35Lac).
• In this case the maximum investment into 54 EC-Capital Gain Tax 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 54 EC-Capital Gain Tax bond will be Rs. 50 lacs even though the long term capital gains amount is Rs. 65 lacs.

Since the investment into 54 EC-Capital Gain Tax 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 consider being taxable long term capital gains in the same financial year in which the sell/transfer took place.