Skip to main content

TAXation: Capital gains

Section 54EC bonds give positive returns, despite a lock-in and tax on interest income

When Ravi Sharma sold property that he had purchased a decade ago, he made a handsome profit on it. But along with this, came the capital gains tax liability. He now had two options.

1)       He could invest the capital gains in Section 54EC bonds that are currently being issued by Rural Electrification Corporation and National Highways Authority of India and thereby save the entire amount. Or

2)       He could actually pay the tax and invest the balance in quality equity funds.

Sharma was inclined towards the second option. The bonds offer a low annual interest rate, currently six per cent and are taxable. Plus, the money remains locked for three years. We decided to run some numbers. The analysis saw Sharma clutching the application form for the bonds. Section 54EC bonds may also be used to save tax on long-term capital gains from sale of non-equity mutual funds, bonds, debentures, gold, jewellery or even gold exchange traded funds.

In spite of the fact that the returns are low, the interest taxable and a three-year lock-in. To know why, examine the table.

The key thing is that on account of being a tax saving bond, they effectively offer investors an up-front 20 per cent discount. It is like investing `80 but earning a return on `100. Also, the 20 per cent gets spread over just the three-year lock-in period of the bonds.

So, say the investor earned a capital gain of `100. Effectively, he will end up investing `80 in the bonds, as he saves a tax of `20. At six per cent, he earns `6every year and at the end of three years, he gets his original investment back. The net equivalent return works out to an eye popping 12.6 per cent yearly, after tax. And if the investor does not have other taxable income, the return climbs to 14.7 per cent per annum.

Sharma's earlier idea was to pay tax and invest in equity funds.

Let's say he were to invest `1 lakh in the market. At 14.7 per cent per annum over three years, the money should grow to around 1,51,000, that is almost 50 per cent more. And this is just to break even. After that, he will actually start making any money.

CAP AT 50 LAKH

There is only one drawback to these bonds —the maximum investment in any one financial year is capped at `50 lakh. Considering the way property prices have spiralled, some investors may find this amount enough to cover the entire amount of capital gains.

However, some planning may help. Remember, you have six months to invest in the bonds from the time of earning the capital gain. If you find you would need a tax cover of more than `50 lakh, time the sale transaction between December and March of any year. This way, the six month period would overlap two financial years and enable you to double the investible amount to `1crore.

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Bharat Bond ETF

Top SIP Funds Online   The government of India has paved the way for the launch of India's first corporate bond ETF called as Bharat Bond ETF. Edelweiss Mutual Fund will be managing it. The fund is mandated to invest in AAA-rated bonds of select public sector companies (see the table 'List of constituents and their proportions in the portfolio'). The government has a threefold objective behind launching this product. One, to deepen the liquidity of the Indian debt markets and provide a gateway for easy retail participation. Two, to solve investors' dilemma of picking premium bonds. Lastly, to help the underlying government-owned companies raise funding for their operations. But does it make sense for you, the investor, to invest in it? Lets find out. What is the product? As the name suggests, it is an exchange-traded fund which will be listed on a stock exchange from where its units can be bought and sold post launch. It will have two variants - one maturing in 3 ye...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now