Latest news with #54EC
India Today
4 days ago
- Business
- India Today
Sold property and want to save tax? This tax expert suggests a smarter way
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 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 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 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
Hindustan Times
12-07-2025
- Business
- Hindustan Times
Sold your property? Should you invest in Section 54EC bonds to save capital gains tax?
If you've recently sold a property and are looking to preserve capital while reducing your tax liability, 54EC bonds could be an option. These tax-saving instruments offer exemption from long-term capital gains (LTCG) tax under Section 54EC of the Income Tax Act, 1961. If you've sold property and want to save on capital gains tax, 54EC bonds may help if you're okay with low returns, capital protection, and a lock-in period. (Representational photo)(Pexels) Designed specifically for reinvesting capital gains, 54EC bonds are a popular choice for those looking to protect profits and avoid hefty taxes after selling real estate or other long-term assets. Experts say they're suitable if you're comfortable with low returns, capital protection, and a lock-in period. 'These bonds are issued by specified institutions, such as the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC), to finance infrastructure projects. By investing in these bonds, individuals can claim exemption from LTCG tax on the sale of certain assets, like land or buildings,' says Saurabh Bansal, founder, Finatwork Investment Advisor, a SEBI RIA (Registered Investment Advisor). How do 54EC bonds work? The key features of 54EC bonds include a lock-in period of five years, during which the investment cannot be redeemed. Investors can invest up to ₹50 lakh in these bonds in a financial year. These bonds typically offer an interest rate of around 5–6 per cent per annum, which is fully taxable as per the investor's income tax slab. The primary attraction of 54EC bonds lies in their tax benefits; they provide an exemption from long-term capital gains (LTCG) tax under Section 54EC of the Income Tax Act, making them a preferred choice for those looking to preserve capital and reduce tax liability after the sale of property or other long-term assets. How investing long term capital gains in 54EC bonds help save tax Let's say Kumar sells a property and makes a long-term capital gain of ₹50 lakh. To avoid paying LTCG tax, Kumar invests the entire capital gain of ₹50 lakhs in Section 54EC bonds. Assuming an interest rate of 5.25 per cent per annum and a LTCG tax rate of 12.5 per cent (post Budget 2024), here's how it impacts his finances over the 5-year lock-in period. From year 1 to year 5, Kumar earns interest on the bonds, which is taxable. The interest earned each year would be ₹2.625 lakh (5.25 per cent of ₹50 lakhs). He will have to pay tax on this interest income annually. Since the bonds come with a lock-in, he cannot redeem them before the 5-year period ends. After 5 years, Kumar will get back his principal amount of ₹50 lakh. By investing in 54EC bonds, Kumar saves ₹6.25 lakh in LTCG tax (12.5 per cent of ₹50 lakhs) and also earns regular interest income over the lock-in period. 'Section 54EC bonds can be a useful investment option for individuals looking to save tax on long-term capital gains. While the interest rate may not be exceptionally high, the tax benefits and regular income can make it an attractive option for those with long-term capital gains. However, it's essential to consider the lock-in period and other terms before investing,' says Bansal. The other option: Paying tax and investing the post-tax amount On the other hand, if the same homeowner decides to pay the LTCG tax and invest the post-tax amount in other options such as mutual funds, equities, or fixed deposits, the outcome would differ significantly. 'Mutual funds and equities can offer higher returns, especially over the long term, but they come with higher market risk. They also provide much greater liquidity, allowing access to funds when needed,' says Amit Prakash Singh, co-founder and chief business officer, Urban Money. Fixed deposits, while safer, offer returns similar to or slightly better than 54EC bonds, with the added advantage of flexibility in tenure and access. Additionally, given the bond's fixed interest rate, the returns on the bonds may become less attractive when return rates increase significantly or in case of rise in inflation, the actual returns may be impacted significantly. 'Hence, one has to check his financial preferences, risk appetite and future returns before deciding on where to invest,' says Singh. 'Choose 54EC bonds if your goal is capital protection plus tax saving and you're OK with lower returns and a lock-in. Choose post-tax investing if you're comfortable with market-linked returns, want higher growth and flexibility, and can absorb some risk,' says Deepak Kumar Jain, founder and CEO, the tax advisory and e-filing portal platform. Can 54EC bonds fund your retirement? 'Yes, a retiree can use 54EC bonds to preserve wealth, especially after selling a long-held property, but whether the interest income is sufficient for living expenses depends heavily on their lifestyle, total corpus, and other income sources,' says Jain. With investment of ₹50 lakh in 54EC and earning ₹2.75 lakh annually as interest income which is ₹20,800 per month effectively. After tax @30% it comes down to ₹14,600 per month. Is that enough in today's time? Also Read: 5 things NRIs should keep in mind before investing in property in India 'In an urban setup anything between ₹14,000 to ₹20,000 cannot be enough taking medical needs into account. Yes, this would work when a retiree's primary goal is capital preservation and tax savings and if he has pension or PF or rental income to support his regular and other expenses,' adds Jain. Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics
