Capital Gain Bonds Interest Rate: Should You Invest In Capital Gain Bonds in 2024?

When it comes to investing prospects, capital gain bonds frequently stand out as a desirable choice for those looking for steady returns together with certain tax advantages. But like with any investment decision, it’s important to understand Capital Gain Bonds Interest Rate to weigh it against other investment options and learn if this is a wise move.

To assist investors in making wise choices, this article explores the characteristics, advantages, tax ramifications, and restrictions of capital gain bonds.

What are Capital Gains Bonds?

Section 54EC bonds, which are often called Capital Gain Bonds, are fixed-income investment options that provide investors with tax exemptions on capital gains. With the help of these bonds, investors can reduce their tax liabilities related to long-term capital gains from the sale of real estate. The 54EC bonds eligible for tax deductions include those issued by specific entities such as REC, PFC, IRFC, and NHAI.

Investors in these bonds are referred to as creditors or debt holders of the issuer, which is usually a government-backed infrastructure company. They cannot be traded on the stock exchange like listed shares, but they are nonetheless a popular option since they may be redeemed before they mature, subject to the minimum holding period, also known as the lock-in period.

Furthermore, even though the interest rate on these bonds is taxable and often ranges from 5 to 6%, they are a preferred choice when it comes to tax savings.

What are the Features and Benefits of Investing in Capital Gain Bonds?

Before you decide on investing in capital gain bonds, it is important to know its characteristics and how it will benefit you with your financial goals. So here is a list of capital gain bond features and benefits that you need to know.

• The starting point for investments in 54EC bonds is ₹10,000, and the maximum amount that may be invested in a financial year is ₹50 lakh.
• PSUs have issued these bonds, which are easily obtainable online and offline. Investors might choose to hold them physically or in a Demat account.
• Investors must hold onto the bond for a minimum of five years from the acquisition date (or, for bonds issued on or after April 1, 2018, the purchase date) in order to be eligible for capital gains exemption. If the full amount is redeemed before this time, long-term capital gains tax will be applied.
• Investments in capital gain bonds are not eligible for deductions under Section 80C of the Income Tax Act.
• In addition to tax advantages, investors could get 5.25% steady interest income, which is interest payable annually.
• Capital gain bonds are considered safe investments since they have government backing and excellent credit ratings. They offer set interest rates and act as a way to reduce capital gains tax obligations.
• Only the amount spent on 54EC bonds is deductible. For example, only the 54EC bonds qualify for exemption under Section 54EC of the Income Tax Act if one channels ₹35 lakh of capital asset earnings after realising a capital asset profit of ₹40 lakh. Taxation will be applied to the remaining ₹5 lakh as long-term capital gains.
• Capital gain bonds, which have the best credit ratings and are owned by the government, are backed by a sovereign guarantee that reduces the danger of default and guarantees the security of investments.

How Does Investment in Capital Gain Bonds Work?

Understanding the long term capital gain is is one thing, but it’s also important to understand how it works and how to calculate it. The instructions that follow provide information on how to calculate capital gains bonds or long-term capital gains:

1. First and foremost, it is critical to assess these bonds’ total worth.
2. It becomes important to deduct all related charges from the overall value consideration, such as ownership transfer fees, indexed purchase costs, and enhanced indexed costs.
3. Additional subtractions include the exclusions outlined in sections 54, 54EC, 54F, and 54B from the sum after step 2.
4. As such, the final sum represents the capital gain over the long term.

Should You Invest in Capital Gain Bonds in 2024?

A 5.25% yearly return (pre-tax) may seem low in comparison to equities funds. Through Systematic Investment Plans (SIPs), the typical flexi-cap fund has generated returns through the use of over 20% over the last five years.

For example, your investment might have grown to over Rs 70 lakh if you had paid an upfront tax effect of Rs 10 lakh (20% of Rs 50 lakh) and invested the remaining Rs 40 lakh in a flexi-cap fund, spreading it out equally over five years. It’s important to remember that three years is usually plenty of time to spread out investments.

On the other hand, the Rs 50 lakh invested in capital gain bonds would have increased to a little over Rs 63 lakh at most. Therefore, it makes sense, both mathematically and logically, to choose to pay the taxes upfront and put money into an equity mutual fund first.

But there’s complication involved when you agree to pay Rs 10 lakh in taxes up front in hopes of larger equity returns. Equity investments are prone to large volatility and come with no assurances, even though they usually give comparatively greater returns over a period of five to seven years. Capital gain bonds, on the other hand, guarantee returns.

Furthermore, a comparative study shows that capital gain bonds are a tax-avoidable way to avoid the Rs 10 lakh tax obligation that comes with equity fund investments. When taking into account this tax benefit, capital gain bonds offer an annual return that practically surpasses 10%, making them a rather strong choice for fixed-income investing over a five-year duration.

Hence it can be easily said that investing in capital gain bonds in 2024 can be feasible for you.

What is the Tax Exemption Rule on Capital Gain Bonds?

Capital gains under Section 54EC are not subject to taxation if they are directed by a taxpayer into “long-term designated assets” during a six-month period after selling long-term capital assets such as stocks or real estate. Government-issued bonds and securities, such as those from the National Highways Authority of India (NHAI) and the Rural Electrification Corporation, are referred to as “long-term specified assets”.

The total amount invested in these bonds cannot exceed Rs. 50 lakhs. In the event that your capital gains surpass this maximum investment limit, you may find that building a home under Sections 54 or 54F is a better option than buying bonds under Section 54EC. If you don’t select one of the options, you will have to pay LTCG tax on the excess capital gains.

The minimum holding period for bonds purchased with capital gains is five years. Premature sale of them negates Section 54EC’s exemption, exposing the initial capital gains to LTCG tax liabilities.

Investing in capital gain bonds can be a strategic move to reduce or defer tax liability arising from long-term capital gains, offering a viable way to save on capital gains tax liability effectively.

How to Invest in Capital Gain Bonds?

Given that capital gain bonds are not traded on the Indian Stock Exchange, they are not available for purchase through conventional stock market channels. Instead, the sole method of acquiring these capital gain bonds interest rate less is via direct buyers, either in a Demat or physical format.

An option to purchase capital gain bonds from entities like NHAI, REC, Indian Railway Finance Corporation (IRFC), and Power Finance Corporation (PFC) presents a tax-saving investment opportunity.

Once you have acquired the bonds, the following steps can be taken to invest in them:

Step 1: Obtain the appropriate bond forms, including those for bonds issued by entities such as the Indian Railway Finance Corporation and Power Finance Corporation, highlighting these as examples of entities issuing the bonds.

Step 2: Opt for the direct download option on the designated webpage.

Step 3: Specify the desired quantity of records for download.

Step 4: Complete the captcha verification and initiate the download process.

Step 5: Ensure your device is equipped with a PDF reader as the documents are typically provided in PDF format.

Step 6: Extract and open the downloaded forms.

Step 7: Fill out the forms accurately as per the provided instructions.

Step 8: If paying through traditional means, enclose a demand draft or account payee cheque along with any required documents at the designated branches of collection banks. Alternatively, utilise NEFT or RTGS facilities for payment and indicate the UTR number in the application form.

What are the Limitations of Investing in Capital Gain Bonds?

Even though they are appealing, capital gain bond investments have some restrictions that buyers need to be aware of. Since these bonds usually have a limited duration and could be difficult to trade on the secondary market, these could entail liquidity concerns. Furthermore, these bonds’ interest rates might change and be impacted by changes in the overall state of the economy.

Who Might Consider Investing in Capital Gain Bonds?

If you have recently acquired profits from investments but prefer to defer tax obligations, capital gain bonds present a viable avenue for investment. Additionally, they offer a predictable interest return alongside tax benefits. These bonds serve as a prudent investment choice for those who prioritise security in their investment strategies.

Final Words

To sum up, capital gain bonds might be a good choice for investors looking for consistent returns and tax advantages. Nevertheless, before making any investment decisions, it is necessary to assess the current state of the market as well as personal investment goals. Investors may choose wisely and in line with their financial objectives in 2024 and beyond by doing extensive study and consulting a specialist.

Moreover, if you have questions regarding capital gain bond investment, visit our Aspero Academy to learn more.