Sold property and want to save tax? This tax expert suggests a smarter way

India Today

2 days ago

For many who have just sold a property, the next big concern is how to avoid paying a substantial tax on the profit. The go-to solution for most is to invest in 54EC bonds such as those issued by NHAI or REC, which are designed to shield sellers from a 12.5% capital gains tax. But according to tax expert Sujit Bangar, this popular strategy may not always be the wisest.advertisementIn a detailed explainer, Bangar lays out two key options available under the Income Tax Act for saving on long-term capital gains tax. 'You can save lakhs in capital gains tax using 2 options: Section 54/54F – Reinvest in a residential property. Section 54EC – Invest in notified bonds (NHAI/REC) within 6 months,' he writes.Section 54EC is the focus of Bangar's analysis. As he explains, 'Under Section 54EC, you can invest up to Rs 50 lakh from your LTCG into NHAI (National Highways Authority of India) or REC (Rural Electrification Corporation). But the investment must be done within 6 months of sale of land/building.'
These bonds come with certain conditions. 'Must be from sale of long-term land/building. Lock-in: 5 years. Cannot pledge/sell before 5 years. Interest: Taxable. Max. investment limit: Rs 50 lakhs,' he notes.The real test, however, is in comparing the potential returns. 'Say Ms. A earns Rs 50L as LTCG. Tax payable @ 12.5% + cess = Rs 6.5L. To save this, she invests in 54EC bonds,' Bangar explains. 'BUT the return is just 5.25% (taxable), and money is locked in for 5 years.'For those in the highest income tax bracket, the post-tax return works out to roughly 3.745%. That, Bangar argues, is not very compelling. 'Now compare this with investing in an equity mutual fund for 5 years,' he continues. 'Returns = 12–14% CAGR. Post-tax (after 12.5% LTCG) = 10.5%–12.25%.'The gap in outcomes can be significant. In fact, Bangar estimates that choosing the equity fund route over 54EC bonds could leave an investor 'with Rs 9.6L+ more in just 5 years.'So what is the smarter choice? Bangar does not dismiss 54EC bonds outright. 'If your priority is 100% tax savings, 54EC is safe,' he says. 'But if you can afford to pay tax and invest wisely, you may walk away with Rs 9.6L+ more.'He adds that 'a mix of arbitrage funds and equity funds may also be considered to balance stability and volatility.' In the end, as Bangar puts it, 'Let your goals decide it.'- EndsMust Watch