54 EC Capital Tax Bonds – How to save your tax after selling house?
POSTED BY ON July 11, 2020 COMMENTS (45)
When you sell any capital asset like a house, gold, bonds or debt mutual funds over a long period, you generally make a PROFIT, which is called as Capital gains. This is treated differently from “interest income” which you get from fixed deposits and these capital gains are taxed at 20%.
In case of selling house, these amounts can be quite big and if you reinvest these capital gains, you will not have to pay any taxes.
However at times, an investor may not want to invest in another house and also not willing to pay taxes.
54 EC bonds can help you in saving the capital gains tax.
What are 54 EC Bonds?
54EC bonds (capital gains bonds) are the best investment option through which an investor can save long-term capital gain taxes.
54EC bonds are specifically meant for investors earning long-term capital gains and would like tax exemption on these gains. The tax deduction is available under section 54EC of the Income Tax Act. However, 54EC bonds can only save long term capital gains taxes, and not short term capital gains taxes. Check out our Capital Gains Tax Calculator
The maximum limit for investing in 54EC bonds is Rs. 50 Lacs.
As we said above, an individual can invest in these bonds after receiving capital gains from selling a property, sale of land, or building (residential or commercial).
If you want to save your capital gains, you will have to make your investments in 54 EC bonds within 6 months from the date of sale of the property or before filing your income tax returns.
Features & Benefits of 54 EC Bonds
- As 54EC bonds are generally AAA rated and hence it is the safest and secure bond as it is backed by the Government of India.
- Interest earned on these 54EC bonds is taxable in nature. So while you don’t pay any tax on the lump sum you got after selling the house or another property, the interest earned from these bonds are taxable.
- No TDS is deducted on interest from 54EC bonds and wealth tax is exempted.
- 54EC bonds come with a lock-in period of 5 years and are non-transferable in nature.
- The minimum investment an investor can make in 54EC bonds is 1 bond amounting to Rs. 10,000 and the maximum investment in 54EC bonds is 500 bonds amounting to Rs 50 lakhs in a financial year.
- The interest these bonds offer is at 5.75% which is payable annually. This is not very high interest, and if you pay taxes on these, the final post tax returns will be much lower.
- These bonds can be held in Demat Form and Physical Form as well.
Eligible Bonds under section 54 EC –
So when we say 54 EC bonds, it’s not exactly a product in itself. There are actually 4 types of bonds which come under the definition of 54 EC bonds. They are as follows –
- REC (Rural Electrification Corporation) – Download form
- NHAI (National Highways Authority of India) – Download form
- IRFC (Indian Railway Finance Corporation) – Download form
- PFC (Power Finance Corporation Ltd- Download form
Let us see the comparison between REC and NHAI as these are the most popular options to invest.
| BOND | REC Bonds | NHAI Bonds |
|
5.75% | 5.75% |
|
AAA/Stable (CRISIL) | AAA/Stable (CRISIL) |
|
Rs. 10,000 | Rs.10,000 |
|
Rs.50 Lakhs in Financial Year | Rs.50 Lakhs in Financial Year |
|
5 yrs | 5 yrs |
|
Annually | Annually |
What if you don’t invest in 54 EC bonds?
If you don’t want to invest in these 54 EC bonds and rather want to invest in other financial products like a fixed deposit, debt mutual fund or equity mutual funds – then remember that first you will have to pay the tax, and then you can invest only remaining amount which may fetch higher return compared to 54 EC bonds returns.
However a quick calculation shows that you are better off investing in EC bonds, if you are not looking forward to invest in equity mutual funds and are ready to take risk. In general it’s usually a good idea to put money in 54 EC bonds and over 5 yrs, you will have decent amount of money.
Only if you are ready to take high risk, and are not looking for lock in, then you can put this money in equity mutual funds. Below is a comparison between all 4 options we talked about
| What? | 54 EC bonds | Fixed Deposit | Debt Mutual Funds | Equity Mutual Funds |
| Capital Gains Amount | 50,00,000 | 50,00,000 | 50,00,000 | 50,00,000 |
| Tax to be Paid before investing | NIL | 1000000 | 1000000 | 1000000 |
| Amount Remaining for Investment | 5000000 | 4000000 | 4000000 | 4000000 |
| Return | 5.75% | 7% | 8.50% | 11% |
| Taxes on Investment | 30.00% | 30% | Approx. 6% (assuming 4% inflation in CII index and 20% capital gains tax) | 10% capital gains tax without indexation |
| Post Tax Returns | 4.03% | 4.90% | 7.99% | 9.90% |
| Final Maturity Amount (Post Tax) | 6090579 | 5080862 | 5874591 | 6412811 |
| Notes | This is Assured | This is Assured | This is not 100% assured, but the final returns you will get will be close to assumption most probably | This is surely dependent on the equity returns, which can be very volatile, so the final result can be much less, or much higher than the assumption |
Note that the only option which has some chances of beating the 54 EC bonds returns is equity, but you have to remember that this is not an option for everyone. Only one who can take right decisions about equity and is ready to take higher risk / high reward path should get into it.
Otherwise, overall investing in 54 EC bonds looks like the best option, but it will come with strict lock in.
So, this was all that I wanted to share in this article. Let me know your queries in the comment section.
Can the bonds under 54EC can be bought only once or every year even if the time of purchase is more than 6 months. Also that only the capital gains amount is to be deposited in CGAS or the full sale consideration. Since we are supposed to utilize capital gains to purchase new house and bonds can we deposit the balance amount in our savings account.In case of joint property do we have to open two separate cgas accounts for calculation of capital gains or jointly.
It can be done any number of times, but why will you want to do that? You will invest in this once when you want to save capital gains, else it does not make sense.
You only need to put capital gains part and not whole sales proceeds!
i bought a house in march 22 and wish to sell it today
the Capital Gains is RS 10L appx
what would be the short term CGTax?
where should i invest to avoid paying tax?
10 lacs is short term capital gains .. No way to avoid it. You will have to pay tax on that!
Thanks for sharing informative blog on capital gain of 54ec.
Welcome 🙂
Hi Sir,
We sold a land worth 80 lacs in June 2020. The 6 months period is over but can we invest in this bond (50 lacs) if tax filing is not yet done?
What about the rest 30 lacs? Can we invest that to buy a house to save capital gain tax on rest 30 lacs?
You anywyas have to only invest the capital gains part to save tax. How much out of this 80 lacs was capital gains?
As a non-resident who has invested in 54EC bonds I receive interest annually and TDS is deducted as per DTAA. Now while filing ITR2 under which head of Income from other sources should I show this income ?
ITR2
Mr X booked a flat in 2011 . Over the next 5 years, he paid the builder Rs. 10 lakhs each year and got possession in 2015 on payment of the final 10 lakhs. He registers the flat in his name in 2017 for a registration fee of Rs, 5 lakhs and sold it off in May 2021 for Rs. 1 crore. He did not make any investment for interior decoration , painting etc. in the flat , nor did he pay any brokerage fees.
Questions is :
1. For calculating indexed price, which year should be considered as the year of purchase? Will it be 2017, 2015 or 2011 or any other year? Should the registration fees be added to the purchase price to calculate the cost of purchase?
Whatever date is mentioned in the property papers officially will be the date considered for calculation..
Registration cost is not added in property cost. Only what is mentioned in property paper as price is to be considered!
Manish
To avail full exemption of capital gain tax under 54EC, 5., how much does the seller of the house property need to invest in Rural Electrification Corporation Bond to avail full avoidance of capital gain tax? Is it the capital gain amount ( i.e selling price minus indexed purchase price) or is it the total sale proceed?
Only the capital gains amount!
Mr X booked a flat in 2011 at Rs. 50 lakhs. Over the next 5 years, he paid the builder Rs. 10 lakhs each year and got possession in 2015 on payment of the final 10 lakhs. He registers the flat in his name in 2017 for a registration fee of Rs, 5 lakhs and sold it off in May 2021 for Rs. 1 crore. For calculating indexed price, which year should be considered as the year of purchase? Will it be 2017, 2015 or 2011 or any other year? Should the registration fees be added to the purchase price to calculate the cost of purchase?
Yes you can add registration fees paid to the cost. Even brokerage
Note that the date will be considered the one which is officially mentioned in the registration document
Can you invest (54EC bond) in spouse/children or other family members name?
No, if you want to claim that..
How is my capital amount invested in Capital gain bonds like REC or NHAI is treated after maturity?
I am going to pay the tax on the interest paid/payable on every financial year along with my other tax payable.
My doubt is when the principal amount invested in the said bond is returned to me, then how is it is treated ?
Is it simply adding to my regular income or can i keep it separate in fixed deposit or other investment plans,
The interest you get each year is taxable. But the final maturity amount is not taxable!
I sold a property and it attracts 12 lakh Capital Gain tax, my Auditor told me to buy a property of same value and you will not be taxable.
Yes, he is correct.
You can buy a property within next 2 yrs and you wont have to pay any tax on the capital gains. These bonds which I was talking about is for someone who wants to save tax and does not want to buy another property!
I have a question,
Instead of keeping money in CGAS account, I start with investing in 54EC bonds for a year and then buy a property immediately with that money fulfilling all terms required to invest in another house to save tax.
Will it work? or the 20% tax will be deducted right away when I will withdraw from bonds.
The money is locked for 5 yrs in 54EC bonds
i niraj gupta want to know that sale of my property the capital gain is say rs 80.0 Lacs.
I want to know that ,if I invest in
up to rs 50 lacs in 54EC bonds and
balance amount in Capital gain Saving account in SBI Bank to purchase the house in future say in 3 years.
this way what will be the net tax Burdon on me >
Hi Niraj
You can use this calculator to find it out : http://jagoinvestor.dev.diginnovators.site/calculators/capital-gains-calculator
Thank you this Article was amazing and the comment from Srinivas as well
a Quick question if you or someone can Elaborate is how would this work out
in case on an NRI who wants to sell the property and put the funds into his NRE
account, where as the capital gains in case of above scenario can NRI’s opt for the 54EC Bonds ?
Read this up – https://www.makaan.com/iq/nri/basic-tax-rules-for-nris-who-are-selling-a-property-in-india
For example if the capital gains on property sale is 100 lakhs, and I invest 50 lakhs in 54EC, then do I pay capital gains tax on only the balance 50 lakhs?
yes
Prima facie yes. With planning this can be circumvented. The rule is one can invest max 50 L/year. If one plans his sale in Jan or Feb for 100 L CG, he will be able to invest 50 L in current year and 50 L next year. Here one should note that we are referring to CG on house/flat sale and not plot. Also only CG need to be invested.
I understand it’s no more valid wef current FY – tax rules amended and maximum 50lakh is allowed
Sir I sold a house in 2017 and invsted the funds in REC bonds. now it is getting matured on August 20. For that amount am I to pay tax or shall I reinvest in REC itself
It wont be taxable !
Thanks.A very useful article
Welcome Deepak
After a capital asset sale(here it is only house/flat, as there is a different process for sale of plot), there are three options one can choose
1. Pay the tax on capital gain(Sale price – Indexed cost of acquisition)
2. If the seller wants to construct/purchase a house/flat with the sale proceeds and if the sale proceeds are invested in that venture, he gets tax exemption to the extent of CG amount in the venture. For this, he has to deposit the money in capital gains account scheme of a nationalized bank.
3. If the seller does not want to construct/purchase a house/flat, he can save tax by investing in government bonds(as per above article).
One should understand that in options 2 or 3, the interest earned is taxable.
Hi Srinivas
Thanks for sharing that. Can you talk a little bit more on point 2 in detail . I think you are referring to that separate capital gains exemption account where one can put the money if they want to buy/construct another real estate later in future. Right?
Manish
One option to utilize capital gains(CG) and avoid paying taxes on CG is using capital gains account scheme(CGAS). CGAS was introduced in 1988 by the Central Government.
In this, a person(of HUF) can utilize CG in acquiring a house/flat within specified time. The person can purchase a house/flat in 2 years or construct a house/flat in three years. Thus the max life of CG account is 3 years.
CG invested in CGAS will be eligible for capital gain exemption as it would in case of re-investment.
A taxpayer who is unable to re-invest CG in the specified investment before furnishing the return of income and specified time limit for the investment has not expired, is required to deposit such unutilised CG in the CGAS before furnishing return of income but not beyond the due date for furnishing return of income.
A capital gains account can be opened in any PSU banks. There are two types of accounts 1. Savings and 2. Term. One of them is to be selected based on how the funds are planned to be utilized. If the amount is planned to be withdrawn gradually(for example during a house construction), savings account can be opened. Else if the amount is planned to be withdrawn lump some (for example purchase of a house) during the period, term account can be opened. The interest rate for suck CG deposits is fixed by RBI from time to time.
Closure of either type of account requires approval from jurisdictional income tax officer. Form G is required to be submitted for the closure of account along with jurisdictional income tax officer’s approval. This was implemented as follows in SBI(Personal experience). One can withdraw and utilize(in construction/purchase) 90% of deposit amount. Balance can be withdrawn and account closed only on providing authorization from IT official. When approached IT officials check the documents like sale documents, deposit documents and utilization of withdrawal amount and give authorization. Based on this, the concerned bank will close the CG account. This is somewhat tedious.
In the process, one should under stand that the interest earned on this scheme is taxable and the is to be shown in IT return of the year of account closure and offered to tax.
Thanks for sharing this Srinivas.. Will create an article on this.
Incase you want to do a guest post .. you are welcome to write a detailed article 🙂
I have never heard of 54 EC. I always thought you had to roll your profit into another property to avoid taxes. If you purchase these securities and then eventually sell them do you have to pay the tax on the house? I don’t understand if you are avoiding the tax or simply delaying it. Could you please clarify?
You can avoid the tax alltogether ! 🙂
Tax management options are to be looked at in proper context.
1. CGAS scheme
CG can be deposited in this account and kept for 3 years. If after 3 years, you are not able to utilise capital gains in construction or purchase, the balance(CG – Utilisation) needs to be offered to tax and will be added to income of last year. Also note that income on CG also will be taxable. One more issue here will be closure of CG account. It requires approval from concerned ITO. For this one needs to answer relevant questions from IT officer.
2. Bonds
The amount invested in these, is locked for a long period of time. May be one can put money to a better use and earn more. In such case, paying tax and discharging liability may be better.
Thus these options need to be seen in light of total benefit and not just in tax saving angle.
Thank You Manish… ????
Welcome, Rahul. If possible share this article with your family and Friends.
Thank You
Anuradha