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Guide for Investment In Capital Gain Bonds

A Financial and management consultant who provides advisory services to their clients regarding managing their business.


1. Introduction

Here, I would like to throw light on a very important subject that is prevailing nowadays which is capital gain bonds. We all have many future plans such as acquiring a house, saving funds or starting a business or industry of our own.

To make these plans successful, we need to create an investment plan. Investing in capital gain bonds can bring great results for an investor in the long term so let us discuss about this in this hub.

2. Features of Capital Gain Bonds

Investment in these bonds allows an exemption under Section 54 EC of the Income Tax Act.

The eligible bonds under Section 54 EC include i.e., Rural Electrification Corporation Limited (REC) and National Highways Authority of India (NHAI), indian railways finance corporation (IRFC), Power grid finance corporation (PFC). Long term capital gains on the profit that person makes when he sells a capital asset, for example, an immovable property, jewelry or shares.

Face value of REC capital gain bond is rupees 10,000/- per bond minimum investment rupees 20,000/- and maximum investment it can be up to 500 bonds of rupees 10,000/- each in a financial year. Whereas, tax benefits and TDS implications are subject to section 54 EC of income tax act and REC act.

For investment in capital gain bonds, the issues open on 1st April every year and close on 31st March of the corresponding year. The credit rating for Rural Electrification Corporation Limited capital gain bonds provided by CRISIL is AAA that represent stable risk.

3. Bonds Available for Claiming Exemption

  • Rural Electrification Corporation Limited (REC)
  • National Highway Authority of India (NHAI)
  • Indian Railway Financial Corporation (IRFC)
  • Power Grid Financial Corporation Limited (PFC)

4. Utilizing Idle Funds

Time taken between accumulating funds and starting any business or acquiring land and building may have some gaps. While the funds are not invested into the acquisition or capital purchase, it is available in liquid form for a longer term which attracts tax implications. Otherwise, any wrong investment of these funds may cause a high tax liability.

Therefore, to preserve funds for the desired purpose without paying a substantial duty even using them to generate some interest income, here is a suggestion every individual or firm can use and the scheme is to invest in capital gain bonds introduced by Government of India.

5. Illustration

  • I met a person Mr Sharma, who has just sold his land located in Uttar Pradesh state for an amount of 50 lakhs in the year 2019. Now he wishes to utilize the money received from the sales proceeds for acquiring land near Madhya Pradesh where his family relocated. He will utilise their funds after three years for acquiring new land.
  • Until the time Mr Sharma does not have requirements of funds in liquid form or is willing to invest somewhere, he can save his tax implications on the amount accumulated out of sales proceeds of a capital asset and also he will get some interest income from the funds until the funds are utilized for a specific purpose.
  • Hence I advised him for investing in such bonds which are according to their needs like investment in capital gain bonds scheme for a period of three years where he will also get interest in return at a fixed percentage.

6. Income Tax Guidelines Regarding Bonds

Income tax offers various guidelines for investing in capital gain bonds. Many financial experts and professionals such as chartered accountants, lawyers and other institutions advise their customers to invest in these schemes.

People invest in these schemes to avoid duty implications and also providing finances to Government of India so they can use these finances for development purpose. Within the domain of Section 54 of the Income Tax Act 1961, the capital gain bonds are being issued as long-term specified assets. Benefit under Section 54 can be availed by buying these bonds only when their is an income from sale of capital asset.

7. Characteristics of Capital Gain Bonds

Below are some important characteristics of capital gain bonds succeeding in India.

  1. Capital Gain bonds lock-in period is 5 years from deemed date of allotment.
  2. Coupon percent per annum/interest rate/payable at 5.75% per annum payable on 30th June every year, interest payment is made by NEFT, at par cheque and demand draft.
  3. Interest on application money accumulate at the prevalent coupon rate from the date of realisation of application amount by the mode of cheque, demand draft, NEFT and RTGS.
  4. These capital gain bond discussed above are for individual and legal entity residing and operating in India however NRI can also invest in these bonds to take advantage of these schemes.

8. Documentation

There are some necessary documents which you need to provide along with the application form while applying for capital gain bonds.

  1. Pan card and address proof photocopy self-attested by the applicant.
  2. Cancelled cheque copy for ECS, RTGS, NEFT payment of interest maturity.
  3. The cheques and DD should be drawn in favour of scheme name in which one is making an investment, such as “Rural electrification corporation limited 54 EC bonds” in case of investment in REC capital gain bonds.

9. Should You Invest In Capital Gain Bonds?

It is evident that how much investor needs to generate from other investments, to compare it with the bond investments.

The desired ROI may not look that difficult to achieve, but since the shares and mutual funds are not fixed return instruments and are market-linked products, so there is considerable risk involved in the complete transaction.

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If one is comfortable with the volatility and agrees to accept the inherent risk, then one may go with the investment options which attracts high tax liability, else capital gain bonds will be suitable. Moreover, investing always should commensurate with your goal requirements and tax planning should be part of your holistic financial plan.

10. Conclusion

Capital gain bonds come with zero risks of repayment and interest. Your annual income from interest earned on these bonds is guaranteed by the government of India. If you are selling your property and are looking for ways to avoid having to pay taxes, look no further than the 54EC bonds as a financial solution.

Sometimes it is desirable to take the risk if the fund is to be invested for a very long-term horizon. Whereas, it is not advisable to accept such risks if the goal is nearby and you have not enough money for that goal. So, one has to decide accordingly.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2019 Prateek Jain


Avyukth Krishna from Bangalore on June 14, 2020:

Personal finance has become essential in today's world. Making money alone is not enough. It is also important to learn how to multiply it. That is where investment ideas come into the picture. Thank you for this enlightening article on captial gain bonds !

Prateek Jain (author) from Madhya Pradesh, India on April 14, 2020:

Thank you trupti mam for your wonderful comment. I am glad that you liked the article. This is a practical guide to invest in capital gain bonds. These bonds are very useful for saving tax implications on your incomes. Please share this information with the senior citizens who have gained a substantial amount form any capital transaction such as selling of land and building etc.

Truptirekha from India on April 14, 2020:

I like the way you started this article. I came to know a lot about gain bonds. This piece of content is worth reading as it provides a plethora of information on gain bonds. Beautiful article. Awesome Prateek, keep it up!

Prateek Jain (author) from Madhya Pradesh, India on April 08, 2020:

Thank you Akash for your appreciation. I am glad that you liked this article. Also, read my other articles related to numerous financial and educational aspects. I hope you will find them interesting too. Keep reading and explore more.

AndazeAkash on April 07, 2020:

What I like in a writer most, is his or her point to point approach and you are one of them. I wish you will recommend by the people for their financial problems.

Best of Luck!

AndazeAkash on April 07, 2020:

The point to point approach is always helpful for everyone.

Thanks for sharing such a valuable information and I really appreciate you hard work.

Prateek Jain (author) from Madhya Pradesh, India on January 04, 2020:

Thank you for your encouragement mam.

Glad to know that you liked the article. I have been researching and suggesting theses bonds to my clients since mast many years and they are really worthy to have in order to avoid tax implications and generate some interest income. Also managing them is really easy, they can be kept in Certificate form or in electronics for in your demat account. Thanks for sharing your thoughts mam.

BRENDA ARLEDGE from Washington Court House on January 04, 2020:

You put alot of work into this article.

Bonds seem to be the safest investment, but waiting so long to acquire their worth can be daunting.

Wish I would've started saving when I was much younger.

Nice write.

Prateek Jain (author) from Madhya Pradesh, India on January 04, 2020:

Thank you Nikhil sir, glad to see that you liked the article. Your comment is very encouraging. I am always writting to guide the investor with my knowledge. I assure you that I will definitely share more insight about the financial markets with all

Niks from India on January 04, 2020:

A well-written article on capital gain bonds that covers good insights about the investments. Your knowledge about the financial sector can guide the investors to reap the benefits of right investing. Waiting to read more articles from you.

Prateek Jain (author) from Madhya Pradesh, India on January 03, 2020:

Thanks for your encouragement suchismita mam, really glad to appreciate the efforts. Definately this is a very informative article and for sure will share more articles on the subject.

Suchismita Pradhan from India on January 03, 2020:

Thanks Prateek for elaborating capital gain bonds and its benefits.The article is well written,contained sound with examples.I look forward to reading your next informative work. Thank you.

Prateek Jain (author) from Madhya Pradesh, India on January 03, 2020:

Thanks for sharing your thoughts on the topic Simran mam. As always I will keep sharing the informative material with you all. Thanks for encouraging me to write and publish more articles on the Financial products. Thanks again, hope you are doing well.

Simran Malhotra on January 03, 2020:

Hey, I found Your Article Very Informative From Investment Point Of You, You Are Really Doing Good Job By Explaining Investors In Detail About Investment Securties Which Are Valuable For Us and helping us to invest our funds in right way and at right time. Keep Sharing More Informational Hubs Like This.

Prateek Jain (author) from Madhya Pradesh, India on January 02, 2020:

Glad to know that you found this article informative prantika mam. This is really a very good initiative by government of India to preserve the idle.funds of individuals and use them for development purpose along with giving an interest income to the owner in for the amount lended. The exemptions are all explained in income tax act 1961. Additionally in order to communicate with the registrar of capital gain bonds an individual can also visit their official website and have the required information from them regarding scheme.

Prantika Samanta from Kolkata, India on January 02, 2020:

I have found this article informative and liked the exemption on Section 54 EC. The section on income tax guidelines regarding bonds is highly beneficial and the list of documents required is crucial. The annual income earned from the capital gain bonds is guaranteed by the Government of India is an important information. Having the adequate knowledge of bonds both short and long terms is necessary before making the investment.

Prateek Jain (author) from Madhya Pradesh, India on January 02, 2020:

Thank you Sumit sir for you valuable comments. Glad to know that you found this informative, it is for every individual who are confused with the rules and policies of income tax for capital gain and benefits of capital gain bonds. I personally guided many people's who don't understand the pros and cons of this schemes. So just thought to share the information with you all.

Sumit Chakrabarti from Kolkata on January 02, 2020:

This is an informative article for anyone who is looking for long-term investments. Different aspects of both short-term and long-term capital gains bonds have been explained clearly in the write-up. I have particularly found the information on bonds under section 54EC. Under this section, a buyer can have tax exemption within 6 months from the date of selling assets. Also, there is no TDS and interest earned from the bond is taxable. Thanks for sharing this article Prateek. Good work!

Prateek Jain (author) from Madhya Pradesh, India on January 02, 2020:

Thank you Krishna sir, definitely I suggest you to just have an understanding before investing in any Financial schemes or product as they may cause a high tax liability. Glad to know you found this informative and that it helped you in some ways.

Halemane Muralikrishna from South India on January 02, 2020:

Your investment tips and elaborate views on different types of benefits is really worthy for financial gains. Next time when I go for investment, I will refer your valuable article, Mr Peateek, thank you.

Prateek Jain (author) from Madhya Pradesh, India on December 20, 2019:

Surely writing more hubs sir also improving and rectifying as per your valuable teachings. Thanks alot sir.

Rajinder Soni from New Delhi, India on December 20, 2019:

Hey Prateek you have provided such valuable information in this hub. The unique examples and mention of CRISIL make this hub superpowerful. Keep writing more informational hubs like this. Please fix the capitalization in titles.

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