If you have capital gains from selling residential property, you will have to pay taxes on it. On selling property within two years of purchase, a short-term capital gains tax of 30 per cent is applicable for those in the highest tax bracket. A long-term capital gain tax of 20 per cent becomes applicable if it is sold after two years.
There are a couple of ways to save taxes on capital gains. One of them is by investing in specified tax-saving bonds under Sec 54EC of theAct.
First of all, let’s understand the key features of these bonds. These are public sector bonds issued by REC (Rural Electric Corporation), NHAI (National Highway Authority of India) or Power Finance Corporation and usually have the highest credit ratings (AAA). Earlier, these bonds were of three-year duration. However, since April 2018, it has been increased to five years. Interest rates of these bonds have changed over the years. Since August 1st 2020, interest rates on REC bonds have been reduced from 5.75% to 5% per annum.
How to buy them?
These bonds are not listed in an exchange. So, you have to buy it directly from the issuer either in physical or Demat form. Each bond can be purchased for Rs 10,000 and at the most, you can invest Rs 50 lakh (500 bonds) irrespective of the financial year. If the property is jointly owned, each partner is entitled to a maximum limit of Rs 50 lakh.
How do they work?
Supposing you sold a property for Rs 1 crore and its indexed cost works out to Rs 60 lakh. Then, capital gains is Rs 40 lakh (1 crore minus 60 lakh). To save on capital gains tax, you can invest Rs 40 lakh in a tax-saving bond. As per regulations, you have to invest in these bonds within six months from sale of the property but not beyond the due date for furnishingreturns.
First of all, evaluate your liquidity situation since the investment is going to be locked for a period of five years. If you have big debt to repay or have no emergency fund, use the money (of property sale) to improve your finances first.
If you are not able to invest in these bonds by the cut-off date, you can also deposit the capital gains amount in any of the notified banks under the Capital Gains Account Scheme, 1988 and continue to get tax exemptions. However, you need to convert such deposits into investment in tax-saving bonds within a span of two years or end up paying short-term capital gains tax.
Can I redeem them prematurely?
No, there is a compulsoryof five years on these bonds. Neither it can be sold in the secondary market nor offered as a security for any loan.
How much return can I earn?
First of all, evaluate yoursituation since the investment is going to be locked for a period of five years. If you have big debt to repay or have no , use the money (of property sale) to improve your finances first.
However, if youris adequate, look towards investing it.
If you are investing Rs 20 lakh in 5% tax-savings bonds, you will get Rs 1 lakh every year. In addition, you would save tax worth Rs 4.16 lakh (@20.8% of Rs 20 lakh including cess) of capital gains taxes.
Capital gains bonds offer good tax savings. However, it comes at the expense of a lock-in. So, evaluate yoursituation before you sign the dotted line.
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