Should You Invest In Capital-Gain Bonds To Save Tax?

Capital-gain bonds can help save tax on the proceeds from sale of property. But given their returns and taxation, are there better options? Here’s the answer.

Anil (47) has recently sold his ancestral property worth ₹1.45 crore. He plans to earmark this amount for his retirement, as he couldn’t save much for it. According to one of his friends who is an accountant, taxable long-term capital gains of the property sold amount to ₹26 lakh. So, he advised Anil to invest in capital-gain bonds. It will make the gains on selling his property completely tax-free under the Section 54EC of the Income Tax Act.

Anil is seeking our advice about whether this would be the right step. Also, he wants to know where he should invest the remaining money.

WHAT ARE CAPITAL-GAIN BONDS?

• The profit on selling an immovable property held for more than two years is taxable as long-term capital gains at the rate of 20 per cent.

• The income-tax law allows adjusting the purchase price for inflation, brokerage paid to the mediator and any other expenses related to the transaction. But one can’t save tax by investing in regular products like Public Provident Fund, tax-saving funds, life or health insurance premium and so on.

• Section 54EC of the Income Tax Act allows a deduction of up to ₹50 lakh from the profit if it is invested in capital-gain bonds within six months from the day you sell your property.

• These bonds are fixed-income instruments issued by infrastructure companies, which are backed by the Government of India. Currently, they are issued by Rural Electrification Corporation (REC), Power Finance Corporation (PFC) and the National Highways Authority of India (NHAI).