54EC bonds, or capital gain bonds, are the best way to save long-term capital gain tax. 54EC bonds are specifically meant for investors earning capital gain and would like tax exemption on these gains. The tax deduction is available under section 54EC of the Income Tax Act. 54EC does not allow any tax exemption on short-term capital gain tax.
Provision as per Income Tax Act
Where the capital gain arises from the transfer of long-term capital assets being land or building or both and the assessee has, at any time within the period of 6 months has after the date of such transfer invested the whole or any part of capital gains, in “long-term specified asset” then the capital gain will be dealt according to the following:-
a) If the cost of “long term specified asset” is not less than the amount of capital gain then the whole amount shall not be charged u/s 45.
b) If the cost of “long-term specified asset” is less than the amount of capital gain then the remaining amount shall be charged u/s 45.
The investment by the assessee in long term specified asset should be made within the period of six months from the date of transfer (date of debit from the bank account shall be considered not from the date of allotment) also the investment amount during the financial year and in the subsequent financial year does not exceed fifty lakh rupees.
Lock-in period
The amount invested in the long-term specified assets should not be transferred within 5 years from the date of acquisition.
Long-term specified asset
a) Rural Electrification Corporation Ltd (REC)
b) Power Finance Corporation Ltd (PFC)
c) National Highway Authority of India (NHAI)
d) Indian Railway Finance Corporation (IRFC)
The minimum amount of investment is Rs 10000 that is 1bond & the maximum that can be purchased is 500 bonds.
Interest Rate and taxability
The interest rate on this bond is 5% payable annually, it is reduced from 5.75% p.a from July 2020.
No TDS shall be deducted from the interest on this bond, but shall be included total income of the assessee.
As per Finance Act 2018, if the assessee takes any loans or advances on the security of long term specified asset, he shall be deemed to be converted (otherwise than by transfer) such long-term specified asset into money on the date on which such loan or advance is taken.
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