54EC Bonds are tax-saving investment instruments designed to provide relief from capital gains tax. They belong to the category of fixed-income securities. Investing in these bonds, also known as capital gain bonds, grants investors eligibility for tax exemption.
Named after Section 54EC of the Income Tax Act, 1961, these bonds offer a provision where investors can avoid paying taxes on long-term capital gains arising from the sale of property, provided the gains are reinvested in specified bonds. Capital gain bonds represent one of the eligible investment options under Section 54EC. These bonds are typically issued by certain authorized Public Sector Units, ensuring government backing for investors.
IRFC Limited
IRFC, the dedicated funding arm of Indian Railways, was established in December 1986 to raise funds from both domestic and overseas markets. Its primary goal is to meet a significant portion of the Extra Budgetary Resources requirement of Indian Railways.
Over the years, Indian Railway Finance Corporation has showcased strong financial performance, enabling it to secure funds at competitive rates and maintain a lower cost of borrowing. Its close collaboration with the Ministry of Railways has contributed to maintaining a low-risk profile. As a result, IRFC bonds have received substantial investor interest.
Recent issuances by IRFC and other public sector units received bids totaling Rs 65,000 crore, surpassing the notified amount of Rs 65,687 crore. The indicative coupon rate for 10-year AAA-rated paper has seen a rise of around 20 basis points compared to the previous year. Despite the tight liquidity conditions in the money market, companies like IRFC are willing to raise funds at higher costs due to the prevailing market situation, as noted by a senior official from a private bank’s treasury department.
| Particulars | Features of IRFC 54EC Bonds |
|---|---|
| Yield Interest rate | 9.95 % |
| Face value/ minimum investment | Rs. 10,000 per bond; Minimum investment Rs. 20,000 |
| Maximum investment | 500 bonds of Rs. 10,000/ per bond i.e. Rs. 50 lakh in a financial year |
| Credit rating | AAA by CRISIL, ICRA and CARE |
| Lock-in period | 5 years from the date of allotment |
| Tax/ TDS | – No TDS- Interest is taxable; principal amount on maturity is tax free |
| Cheque / Draft to be drawn in the name of | IRFC CAPITAL GAIN BOND |
| Mode of holding | Physical |
What are Capital Gains?
Capital gains refer to the profits one earns when selling an asset. Capital losses occur when the selling price is lower than the purchase price. Long-term capital assets, held for specific durations, are subject to taxation upon sale. For real estate, long-term capital gains are taxed at 20%. 54 EC Bonds, also known as Capital Gain Bonds, provide a means to save on taxes by investing capital gains into these bonds, thereby qualifying for tax exemptions.
Key Features of 54 EC Bonds
Investment Amount
The investment amount ranges from INR 10,000 (1 bond) to INR 50 Lakhs per financial year (500 bonds).
Interest Rate
54EC Bonds offer an interest rate of 5.25% per annum, payable annually. However, this income is taxable, and no TDS is deducted.
Tenor
These bonds have a maturity period of 5 years from the date of issuance
Lock-In Period
There is a lock-in period of 5 years from the date of investment, after which the bonds are automatically redeemed at par upon maturity.
Holding Options
Investors can hold 54 EC bonds in their existing demat accounts or in physical form, based on their preference.
Time Limit for Investment
Investment in 54 EC Bonds must be made within six months from the sale of the capital asset to avail of the exemption.
Exemption Criteria
Exemption under 54 EC Bonds is applicable only for profits from property sales, including land and buildings (both residential and commercial).
Benefits of 54EC Bonds
Secure Investment
Capital gain bonds 54 EC are a secure investment choice backed by the government, minimizing risks for investors.
Tax Benefits
These bonds offer tax exemption, providing investors with a valuable tax-saving investment avenue that can also be reinvested.
High Credit Rating
54 EC Bonds carry a AAA rating due to government backing, ensuring a high level of safety and making them an attractive investment option.
Additional Income
Investors can earn an annual interest of 5.25% on their investment, providing an additional source of income.
