Capital gain bonds: Definition, Characteristics and, Tax Exemptions

How do you define Capital Gain Bonds?

54EC, also known as Capital Gain Bonds, are investments in bonds that can help you to save on tax. Capital Gain Bonds have been specifically designed to help investors to put their money into long-lasting infrastructure projects run by state-owned PSUs with a tax-saving opportunity. The name originates from Section 54EC in the Income Tax Act of 1961, allowing investors to get tax relief on capital gains.

What exactly is Capital Gains Tax?

Capital Gain is an economic term defined as the amount of profit made through the sale of Capital assets (e.g., Land or Building) that have been stored for a long time. Profit or gain is derived when you sell the asset at a more significant price than the purchase price. It is determined as the difference between these two prices. Investors have to pay taxes in the year that the capital asset is transferred, which is known as Capital Gains Tax.

Characteristics of Capital gain bonds

The essential characteristics of Capital gain bonds include the following:

1. The lowest investment requirement is Rs. 10,000, which is the cost of one bond. The maximum number of bonds that may be purchased is 500, which sets the maximum investment amount at Rs. 50 lakhs.
2. The earnings generated by this asset are paid in the form of interest rates set at 5% annually.
3. The interest paid on bonds will be added to the total income and taxed at standard rates along with other income sources.
4. The amount of money invested into these bonds has a locked-in period of 5 years from the date of acquisition. If the asset you have chosen to invest in is removed or transferred somewhere within five years, the money is subject to capital gains taxes.

When is this tax exemption available?

This exemption only applies to capital gains over time by selling a capital asset like land, building or both. The assessee must invest the profit at any point within six months after the date of transfer of the purchase. The amount financed may be used as a tax exemption.

Two of the following guidelines have been outlined for the capital gain that results from the long-term asset:

• If the long-term asset’s cost or purchase price is not less than the quantum of capital gain, the total amount won’t be taxable under section 45.
• If the cost of purchasing the specified asset with a long-term duration is less than the quantum of the capital gain, the remainder is charged under section 45.