After putting his apartment in the market for three long years, 55-year-old Suresh Pradeep was in for a shock when his CA asked him to keep about ₹15-16 lakh as tax aside of the ₹80 lakh received from the buyer. Suresh was hoping the ₹80 lakh full proceeds would serve a neat retirement corpus, but now he is looking at ways to save on tax. Suresh is not alone. The tax on long term capital gain (LTCG) is 20 per cent can be a hefty one. While you can save your tax bill by investing the proceeds in another property, but that doesn’t help much. So, investment in bonds approved under Section 54EC do the same trick better. Section 54EC of the Income tax Act notifies certain bonds in which the capital gains can be invested to claim LTCG tax exemption. These bonds offer interest rate, which is 5.25 per cent from April 1, 2023 which is 25 basis points higher than FY23. Here is all what you need to know about these instruments.
What is Section 54EC bonds
Any asset held more than 36 months is treated as long-term capital asset (except unlisted shares of a company and immovable property being land or building or both where the time limit is 24 months or more and 12 months for listed shares, units of UTI, units of equity mutual funds, zero coupon bonds). In case this long-term asset is sold at gain after indexation benefit, this long-term capital gain is liable to be taxed. Section 54EC of Income Tax Act,1961 notifies certain bonds in which the accrued long term capital gain may be invested to claim LTCG tax exemption. These bonds are open for subscription from April 1 to March 31 of the financial year.
The interest paid on this bond will be taxable in the hands of the investor. The tenure of these bonds is 5 years and cannot be redeemed before this period, signalling poor liquidity for the bond holder in the interim. According to Income Tax Act, the investment in these bonds must be made within six months of the sale of the property in order to be eligible for LTCG tax exemption. The value of one bond is generally ₹10,000 and minimum investment required is ₹20,000 while maximum investment allowed is ₹50 lakh.
Who offer these bonds
At present, three PSUs are offering this bond. They are- REC (Rural Electrification Corporation), PFC (Power Finance Corporation) and IRFC (Indian Railway Finance corporation). These three PSUs have come up with new series of 54EC bonds for FY24 at 5.25 per cent. These bonds have the highest AAA rating from agencies such Care, ICRA and Crisil which means highest creditworthiness and lowest default risk.
The coupon payment date of PFC is July 31 each year whereas for REC and IRFC the coupon payment date is June 30 and October 15 of each year respectively. Interest in the year 2023 will be paid only to the investors whose allotment will be done by June 30, 2023 for PFC, May 31, 2023 for REC, and August 31, 2023 for IRFC. Else, the first coupon payment will be in 2024.
Since the maximum limit for investment is ₹50 lakh, investors seeking diversification can split the proceeds and invest in the bonds of these companies. Investors can park the funds in the bonds of IRFC and PFC or REC (since PFC is the parent company of REC).
According to Crisil, PFC and REC have dominant positions in power sector financing space and have strategic importance due to Government of India (GoI) ownership. However, most of its clients are from the power sector, including discoms, who do not necessarily have strong asset quality. Ratings agencies opine that IRFC is favourably placed as it derives most of its business from GoI. The only weakness mentioned was its average earnings profile.
How to invest
Investors can apply to these bonds both offline and online. For offline application, the applicant must submit cheque/DD/NEFT/RTGS along with the application and the necessary annexures, documents to the collecting bank. Applicants willing to invest online can visit the issuer’s website and complete the application process by filling the application form, submitting the required documents (cancelled cheque, KYC documents etc.) and complete the online payment formalities. In addition to these traditional modes, applicants can also invest through brokers, and platforms such as IndiaBonds.