Reducing Your Tax Liabilities with 54EC Bonds
Understanding the Benefits of 54EC Bonds for Tax Reduction
As Benjamin Franklin says, in life, only two things are certain: death and taxes. While you can’t control the first, as an investor, you can certainly undertake measures to reduce the latter.
Fixed-income instruments like bonds are one of the most popular investment options for reducing tax liability. By knowing the tax implications of different types of bonds, you can save money on your tax outgoings. For this article, let’s focus on 54EC bonds and how investing in them can help you save on taxes.
What are 54EC bonds? How do they reduce your tax liability?
Have you recently sold an immovable property, or are you planning to sell one soon? If the answer is yes, you should know the tax liability. If you sell the property within 24 months of purchase, Short Term Capital Gains (STCG) tax is applicable as per your tax slab. If you sell the property after 24 months, you will have to pay a 20% Long
Term Capital Gains (LTCG) tax.If you want to save tax here, the solution is to invest in 54EC bonds, also known as Capital Gains Bonds. You need to invest the sales proceeds of the property sold in 54EC bonds.
The primary purpose of investing in this bond category is that it offers a 100% LTCG exemption for up to Rs. 50 lakhs. The only condition for this tax benefit to be applicable is if the time between the sale and bond investment is within 6 months and it is a long-term property investment.
A few of the popular capital gains bonds are issued by government-backed infrastructure and infrastructural development companies like Power Finance Corporation Limited and the National Highway Authority of India.
You should note that 54EC bonds provide LTCG exemption only on the invested amount for sale procurements of immovable property. Any gain, typically 5% to 6%, you may receive from investing in these bonds is taxable.
Example of 54EC bonds
Let’s understand the taxation part of 54EC bonds with an example.Suppose you have sold your old house for Rs. 85,00,000 after 5 years of purchasing it for Rs. 40,00,000. The indexation benefit on the house comes to around Rs. Rs. 50,00,000. To save taxes, you decided to invest in a 54EC bond that offers a coupon rate of 5.5% for 7 years. This is how it will work out.
| Sale procures | 85,00,000 |
| Indexation on the house cost | (-50,00,000) |
| LTCG invested in 54EC bond | 35,00,000 |
| LTCG liability arising from the sale of a house | 0 |
| Return on 54EC bond after 7 years | 50,90,000 (rounded off) |
| LTCG on 54EC bond | 15,90,000 (50,90,000 – 35,00,000) |
If you have sold the bonds within 36 months, it would have been the case of STCG, and the gains are then added to your annual income.
Thus, the invested amount provides you with an exemption, but the interest earned on that is taxable.
Conclusion
If you have recently sold a property and are looking for ways to reduce your tax liabilities, 54EC bonds, without a doubt, are a great choice.
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