Capital gain bonds constitute an attractive investment instrument for individuals seeking to avoid taxes and lock their capital.
With bonds and other long-duration securities ideal for reinvesting long-term capital gains in a safe and tax-efficient manner, these bonds earn the interest of investors who predominantly want a stable investment. But it is natural to ask who is eligible to invest in capital gain bonds.
What Are Capital Gain Bonds?
Capital gain bonds are financial securities issued under Section 54EC of the Income Tax Act, of 1961.
The bonds allow the investor to reinvest long-term capital gains on the assets or properties, thereby postponing the tax liability.
If the investment is made in these bonds, the exemption on capital gains arising shall be available only when the property has been disposed of within a specified period.
Eligibility Criteria to Invest in Capital Gain Bonds
To qualify for the investment in capital gain bonds, individuals and entities have to comply with a set of eligibility criteria:
Resident Individuals and Hindu Undivided Families (HUFs)
- Individuals need to be resident Indians and must have long-term capital gains that can give rise to capital gain bond investments.
- In the case of HUFs, a Hindu Undivided Family may invest in these bonds that are issued for the benefit of its members.
Non-Resident Indians (NRIs)
- An NRI is eligible to invest in capital gain bonds only if allowed by the issuing authority.
- It would be advisable for NRIs to check for their eligibility in the terms and conditions underlying the bond issue.
Companies and Other Entities
- Companies, partnership firms, or any corporate entities having long-term capital gains can invest in capital gain bonds.
- Public Sector Undertakings (PSUs), trusts, and cooperative societies can invest subject to specific guidelines.
Investment Conditions for Capital Gain Bonds
The conditions pertinent to investing in capital gain bonds, although the qualifying individuals and entities may be willing to borrow, are as discussed below:
Minimum and Maximum Investment Limit
The minimum investment shall usually be one bond of face value of Rs. 10,000.
The maximum investment for an investor, in any financial year, would thus be Rs. 50 lakh.
Lock-In Period
The lock-in period mandated is five years for capital gain bonds.
An early exit to redeem bonds before the completion of five years is not allowed, thus requiring long-term commitment on the part of the investor.
Eligible Bonds Under Section 54EC
Bonds issued by the following can be the eligible ones under Section 54EC:
Rural Electrification Corporation (REC)
National Highways Authority of India (NHAI)
These bonds must be purchased by the investors within six months of the realization of capital gains for the bondholders to claim tax benefits.
Advantages of investing in Capital Gain Bonds
Investments in capital gain bonds provide several benefits:
Tax Exemptions
Investors may get an exemption from long-term capital gains tax under Section 54EC because of their reinvestment of gains in these bonds.
Safety and Stability
Capital gain bonds are secure because they are generated by government papers.
Input of Fixed Interest
These bonds have a fixed interest rate paid per annum with interest rewards making them subject to tax.
Diversification
These investments are another avenue other than shares and mutual funds.
Limitations to Consider
Only considering the bigger advantages, capital gain bonds have small disadvantages as well:
Low Interest Rate: The interest rate for capital gains bonds is low compared to other fixed-income securities like fixed deposits.
Lock-in-Purchase: The five-year lock-in prevents all liquidity and thus categorically eliminates prospects for choosing other funds.
Taxation on Interest Income: The interest income from these bonds and securities will be taxed under income tax, adversely affecting the net return.
How to Invest in Capital Gain Bonds?
Investors are required to access the authorized entity banks and financial institutions for the purchase of capital gain bonds. In general, the process would involve:
Submission of Application Form: An application form has to be filled by the investors, and available at the banks or designated online portals.
Modes of Payment: Payment can either be made through a cheque demand draft or bank transfer.
Issuance of Bonds: The bond certificate is issued to investors following successful payment and verification. The bonds may be held in either physical form or demat form.
Conclusion
Capital gain bonds provide an excellent opportunity for tax savings to individuals/institutions with long-term capital gains. Beyond securing the principal and comforts of taxation, the investor must analyze his needs for funds before sinking into the mandatory lock-in.
Apart from resident individuals and HUFs, these bonds should also be available to corporate entities if they look toward a stable, tax-efficient opportunity for reinvesting capital gains.
