Should you buy capital gain bonds to reduce your tax burden?

Long Term Capital Gains are the gains made on the sale of a Long-Term Capital Asset, and they are subject to Capital Gains Tax. However, if this amount is invested in Capital Gains Bonds specified in Section 54EC within 6 months of the sale of the previous asset, (whether residential, commercial, or otherwise) such tax can be avoided.

It should be noted, however, that the exemption from Capital Gains applies only if the asset sold is land or a building (whether residential, commercial, or otherwise) that has been held for more than two years. If the sold land/building was held for less than two years, it was classified as a short-term capital asset, and tax was levied on such assets at the applicable Income Tax Slab Rates.

NHAI, REC, PFC, IRFC capital gain bonds

The interest earned on these bonds is subject to income tax. It should be noted that interest is not tax-free, and tax on interest must be paid according to the taxpayer's income tax bracket?

The bonds issued by NHAI, REC, PFC, and IRFC are AAA Rated Bonds, indicating that they are highly stable, and each bond has a face value of ?10,000. If the buyer intends to invest more in these bonds, he can purchase in multiple of ?10,000.

However, the maximum number of bonds that an investor can purchase is 500. As a result, the maximum investment in these bonds per year is limited to??50 lakhs. The maximum capital gains exemption that a taxpayer can claim under Section 54EC is also ?50 lakhs.

Other features of NHAI, REC, PFC, IRFC Capital Gain Bonds

• The Capital Gain Bonds are non-transferable and non-negotiable, and they cannot be used as collateral for any advance or loan.
• These Capital Gain Bonds can be held in either physical or Demat form.
• The application cannot be revoked if the purchase price of the bonds has been paid.
• It is recommended that investors keep a photocopy of the completed application form.

How to Buy Capital Gain Bonds

These Capital Gain bonds can be purchased directly from NHAI, REC, PFC, IRFC or from authorized bond brokers. There is no online mechanism for purchasing these bonds; instead, a person must physically visit their office and fill out a physical form. After purchasing these bonds, you can keep them in either physical or Demat form, but you cannot buy them online.

Disclaimer

So, if you want to avoid market risk and your short-term goals are not aligned with the funds received from a property transfer, you may prefer to invest in capital bonds. However, if you have a longer investment horizon and are willing to take on more risk, or if you need the fund for short-term goals, you may choose to pay the capital gains tax and consider other investment options for deploying the funds.