If you plan to sell your house or a plot of land, make sure you have a tax-efficient sale. First, sell the property only after at least two years from acquisition. This will qualify the gains as long-term and get you the benefit of lower tax — 20 per cent with indexation benefit. If you sell within two years, the gains will be considered short-term and taxed as per your slab rate.
Even the 20 per cent tax (after indexation) on the long-term gains can be avoided, if you invest the gain in another residential house or in specified bonds. If you don’t plan to go for another property, invest the gains in bonds specified by the government. These bonds are commonly known as capital gains bonds or Section 54EC bonds, and are issued by four public sector organisations — National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC) and Indian Railway Finance Corporation (IRFC).
The tax break under Section 54EC is available to the extent of gains you invest. So, deploy the entire gains to avoid the tax fully. You can deploy a maximum of ₹50 lakh in these bonds, and must do so within six months from the property sale. Note that this limit of ₹50 lakh is an aggregate limit across the financial year of the property sale and the next financial year. In case of sale of jointly-owned properties, the limit of ₹50 lakh applies to each joint owner.
Earlier, the tax benefit under Section 54EC was available on reinvestment of long-term gain on sale of any capital asset. But Budget 2018 restricted the benefit to long-term gains from sale of only land or building or both. Also, the tenure of the specified bonds was increased from three years to five years.
High level of safety
The Section 54EC bonds being issued by all the four government-run entities — NHAI, REC, PFC and IRFC — have been rated AAA, indicating the highest level of safety.
The annual rate of interest in all these bonds is currently 5.75 per cent (for issues in FY 2019-20). The interest rate at the time of investment stays till the maturity of the bonds and the interest is paid out once every year. The interest payment date differs – NHAI pays interest on its bonds in April, REC pays in June, PFC pays in July and IRFC pays in October. The principal amount is returned in the form of a bullet repayment, that is, on maturity at the end of five years from allotment.
The interest payment is taxable but there is no tax deduction at source. While the annual interest rate of 5.75 per cent may seem low compared to what other fixed income investment options in the market offer, the savings on capital gains tax adds significantly to the effective returns of Section 54EC bonds. The minimum amount of investment in the NHAI issue is ₹10,000 (one bond) while it is ₹20,000 (two bonds) in the other three issues.
These bonds cannot be purchased online. They have to be bought by submitting physical application forms to your broker or directly to specified branches of banks appointed by the bond-issuing entities.
Restrictions
While they can be quite useful, investors must note that the Section 54EC bonds come with some restrictions. The bonds are non-transferable, non-marketable and non-negotiable. Given that the bonds cannot be transferred, they are also not listed on any stock exchange. In effect, the bonds have a lock-in of five years. Besides, the bonds cannot be offered as security for any loan or advance.
In case the investor transfers the bonds or converts them into money before the period of five years, the capital gains exempted from tax earlier will be reversed. Also, if the investor uses the bonds as security to get any loan or advance, it will be deemed that the bonds have been converted into money and the capital gains exempted from tax earlier will be reversed.