REC Bonds to Save Long Term Capital Gains Tax u/s 54EC

After NHAI, REC (Rural Electrification Corporation Ltd) too has  come up with its fresh issue of Capital Gains Bonds (Series IX) of Rs 1,000 crores.

REC Capital Gains Bonds – Significant Points:

  • Offer Period: April 1, 2013 – March 31, 2014. So you can invest in these bonds for the entire financial year of 2013-14
  • Annual Interest Rates: 6% per annum
  • Deemed Date of Allotment: Last day of the month during which the application amount has been cleared and credited to REC’s collection account
  • Maturity: 3 Years from date of allotment
  • Price of each bond: Rs 10,000
  • Minimum Investment: 1 Bond (Rs 10,000)
  • Maximum Investment: 500 Bonds (Rs 50 Lakhs)
  • Credit Rating: ‘CRISIL AAA Stable’ by CRISIL/“CARE AAA” by CARE /‘AAA (ind)’ by Fitch Ratings
  • Loan against Bonds: The Bonds are non-transferable, non-negotiable and cannot be Offered as a security for any loan or advance
  • Trustee: IDBI Trusteeship Services Ltd., Mumbai

REC Capital Gains Bonds – Who can invest?

Any individual, Hindu Undivided Family (HUF), or non-resident Indians (NRIs) can invest in these REC capital gains bonds. The amount invested should be the long term capital gains made by selling residential property held for more than three years or more.

REC Capital Gains Bonds – How much Capital Gains can you Save?

The long term capital gains on sale of residential property (held for more than 3 years) are taxed at 20% with indexation. You would need to invest the long term capital gains made within 6 months of date of sale of the property.

We explain this by an example:

You bought a house in April 2007 for Rs 50 Lakhs and sold it on April 2011 for Rs 1 Crore. This is how the capital gains would be calculated.

The property has been held for more than 3 years and so it qualifies for Long term capital gains.

Next you have to look at Cost of Inflation Index (CII) published by Income Tax Department every Financial Year.

  • The CII for FY 2007-08 when the house was bought is 551
  • While the CII for FY 2011-12 when the house was sold is 785
  • So the CII adjusted purchase cost would be Rs 50,00,000 * (785/551) = Rs 71,23,412
  • Long Term Capital Gains = Rs 28,76,588 (1,00,00,000 – 71,23,412)
  • Tax Liability = 20% of Rs 28,76,588 = Rs 5,75,318

So out of Rs 1 crore that you get out of sale, you would need to invest the entire long term capital gains of Rs 28,76,588 in Capital gains Bond by October 2011 (i.e. within six months of date of sale) to save tax of Rs 5,75,318.

In case you invest only part of the capital gains, the remaining amount would be taxed at 20%.

Is Capital Gains Bond Interest taxable?

There is a misconception that the interest earned on capital gains bond is tax free as there is no TDS (Tax Deduction at source) deduction by REC. But unfortunately the truth is the interest earned from capital gains bond is added to your income and taxed at marginal rate of your income tax.

REC Capital Gains Bonds – How to buy?

The application form for REC Capital gains bond can be obtained/ submitted at select branches of  HDFC Bank, Canara Bank, IDBI Bank, Indusind Bank, ICICI Bank and Axis Bank

REC Capital Gains Bonds – Should you invest?

If you want to save your long term capital gains tax on sale of residential property u/s 54EC, there are two options:

  1. Reinvest in another residential property within stipulated time frame as per Income tax laws or
  2. Invest in capital tax gains bonds of REC (Rural Electrification Corporation Ltd) or NHAI (National Highways Authority of India)

As far as the investment in capital gains bonds like REC/NHAI is concerned, the interest offered is just 6% and that too taxable. So at times it might make sense to pay long term capital gain tax and invest the rest of amount in higher return investments.

REC or NHAI Capital Gains Bonds?

I have written about NHAI capital gains bond here. If you compare both the Capital Gains bond from REC and NHAI, they are same in terms of Risk and Return. The decision on which bond to invest should mainly depend on which bond is easier for you to invest or what you want to support – Building Highways or providing electricity to rural areas :).

REC Capital Gains Bonds – Application Form

You can get more details and detailed prospectus and application form from here.

4 thoughts on “REC Bonds to Save Long Term Capital Gains Tax u/s 54EC

  1. Bansi Lal Bijlani says:

    A very good site I was not aware of. Shall access it on regular basis henceforth. Thanks

  2. My mother 83 years old , Flat purchased in the financial year 1982-83 for Rs.1,07,000/- and is sold in year 2013-14 for Rs. 40,00,000. what is capital gain and how much tax is to be paid?

    1.Cost of Flat : Rs 1,07,000/-
    2.Date ofPurchase : 17.8.1982
    3.Financial Year 1982-83

    • The CII for Fy 2013-14 has not been notified yet and so the calculation is according to FY 2012-13. You capital gains would be Rs. 31.63 lakhs and your capital gains tax would be Rs 6.33 Lakhs.

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