If you have sold residential property and have generated profits (capital gains), then you will have to pay capital gains tax on it. But there are a few ways to save tax on selling your property.
The Long Term Capital Gains (LTCG) from property sale is exempt if the sales proceeds are used to buy a residential property within 2 years or if you go for construction of residential property within 3 years from the date of sale of your existing property.
But what if you don’t want to put money back in real estate?
Then you can invest your money (capital gains) in the Capital Gains Bonds available under Section 54C of the Income Tax Act. Popularly called the 54EC Bonds or the Capital Gain Bonds, these can be used to save paying taxes on your capital gains (LTCG) arising from the sale of the property.
Note – The deduction under Section 54C was earlier available on other kinds of capital gains as well. But since 2018, it is only available to real estate capital gains only.
The minimum amount that you can invest in these bonds is Rs 10,000 and the maximum is Rs 50 lakh. But you cannot split the amount across two financial years. So if you have capital gains of Rs 1 crore, you cannot split it into 2 parts of Rs 50 lakh each and claim them in two different financial years. You can only invest a maximum of Rs. 50 lakh only.
Also, the amount of exemption would be equal to the amount of capital gain or the amount invested in the specified bonds, whichever is lower (up to Rs 50 lakh only).
The current annual interest rate is 5.0% on Capital Gains Bond (54EC). This interest amount is paid every year. There is no compounding of this interest. Only simple interest is paid out every year. There is no cumulative option.
These Capital Gains Bond 54EC have the highest credit ratings (AAA) and are offered by Rural Electrification Corporation Ltd (REC), Power Finance Corporation Limited (PFC), Indian Railway Finance Corporation Ltd (IRFC), and National Highways Authority of India (NHAI).
The duration of the capital gains bonds is 5 years. Before 2018, it was 3 years.
But there is one important condition. If you want to invest in 54EC bonds, then you need to purchase them within 6 months of the sale of the property and generation of your capital gains. In case you are unable to purchase the bonds within 6 months, then this exemption will not be available to you.
Let’s take a small example.
Suppose you bought a house for Rs 1 crore a few years back. Now you want to sell it and a buyer is ready to pay you Rs 2 crore for the house. So you are getting an actual profit of Rs 1 crore (= Rs 2 cr – Rs 1 cr).
But the purchase price needs to be adjusted via indexation using CII index. So suppose the indexed cost comes out at Rs 1.25 crore.
Therefore, the long-term capital gains (LTCG) work out to Rs 75 lakh (Rs 2 cr – Rs 1.25 cr).
Now within the limit of Section 54EC, you have the option of saving tax on up to Rs 50 lakh by investing in Capital Gains Bond. To save on the capital gains tax, you can invest Rs 50 lakh in a 54EC bond within six months from the sale of the property.
So this way, you can avoid tax on paying the Rs 50 lakh amount. You only need to pay tax on the remaining taxable amount, which is Rs 25 lakh (= Rs 75 lakh capital gains – Rs 50 lakh invested in 54EC bonds).
Can I redeem Capital Gains 54EC Bonds prematurely before 5 years? No, the 5 years lock-in is compulsory. So you should make sure that you are clear about your money requirements for the next 5 years. If you need some of the money (generated from capital gains on the sale of the property) within the 5 years, then you should not put that money in 54EC Bonds.
What about Income Tax Benefits on Capital Gains Bonds? You are already getting a deduction of up to Rs 50 lakh on capital gains. You will not get any additional tax deduction on income tax under Section 80C of the Income Tax Act. But yes, the interest amount (~5%) received every year is still taxable as per your income tax slab. And are these Capital Bonds taxable on maturity? No. Only the annual interest is taxable. The principal is still tax-free on maturity.
But what if you don’t invest in 54 EC bonds? Then you will have to first pay the tax, and then you can use the remaining amount to do whatever you want. You can invest it elsewhere like in equity funds, debt funds, bank fixed deposits, or anything else that you like.
So that was all about the 54EC Capital Gains Bonds. These no doubt offer good tax savings for the bond buyers. But it still has a lock-in of 5 years that may not suit everyone. I hope you found this article on How to save tax on selling house/property using Capital Gains Bond 54EC in India (2021)?