Instead of paying long-term capital gains tax at the rate of 20 per cent, you can invest in bonds issued by select PSUs such as REC (Rural Electrification Corporation). This way, you can not only save on capital gains tax but also earn interest on the same.
If you hold an asset for more than two years and sell it, the capital gain is liable to income tax.
To save this tax, taxpayers, under Section 54EC of the Income Tax Act, are entitled to invest in tax-saving bonds, such as those issued by REC. Starting from 1st April, 2022; NHAI has discontinued these bonds while REC has introduced new series of 54EC capital gains tax.
Taxpayers should be aware that this investment can be made within six months of selling the asset generating capital gains. Being AAA-rated, these bonds provide investors with protection.
After selling these bonds on completion of five years, taxpayers have nowhere to invest, and the cash received is tax free, subject to tax on interest earned on these bonds.
illustration: Let’s say you have . is the property of 60 lakhs which you sold after holding it for more than two years and the capital gain earned thereon is 25 lakhs since you bought it 35 lakhs. Since you do not intend to buy a new property immediately, you cannot keep the money for more than six months without paying tax on it at the rate of 20 per cent.
So, the other option is to buy REC bonds. 25 lakhs. These bonds will offer interest every year, save on your capital gains tax and make your capital extremely safe in these bonds.
Are there any drawbacks as well?
Investing in these bonds is considered safe and rational, but it also has some drawbacks. Take this as a sample: The interest offered on these bonds is only five per cent, which is less than inflation, which is currently between 6.5 and 7 per cent.
There is a maximum investment limit 50 lakh in a financial year. So, in case of total capital gain earned 60 lakhs, you have to pay tax on the balance 10 lakhs.
On top of this interest is paid every year, thereby depriving investors of the power of compounding. Also, the interest paid is also taxable. Which further reduces the net interest received.
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