Tax-saving infrastructure bonds are a good option in the fixed income category. These are issued by infrastructure companies approved by the government and they offer a decent rate of interest plus tax benefits.

Investment up to Rs 20,000 in these bonds is eligible for income tax deduction under Section 80 CCF of the Income-Tax Act. This is over and above the Rs 1,00,000 deduction available under Section 80C. These are long-term secured bonds which mature in 10-15 years.

IFCI Ltd and PFC recently closed their infra bond issues. A few others, such as LIC, Infrastructure Development Finance Company, L&T Infrastructure and India Infrastructure Finance Company, are getting ready to launch their issues.

WHO CAN APPLY

Hindu undivided families and any Indian resident who is not a minor can invest in these bonds. A person should ideally submit only one application. Multiple applications will be aggregated based on the permanent account number or PAN.

Tax adjusted return

The tax benefit will be allowed only on investment up to Rs 20,000. The bonds can be held both in demat and physical forms.

CAP, LOCK-IN

The minimum investment is Rs 5,000. There is no cap. However, income tax deduction is available only up to Rs 20,000. The bonds have a long maturity period of 10-15 years.

However, companies offer a buyback option, wherein the investor can surrender the bonds after five years without sacrificing his interest income. The bonds are listed on stock exchanges and can be traded after the five-year lock-in period.

INTEREST

The issuers cannot pay more than the yield on government securities of same maturity. At present, 10-year government bonds are offering 8.5-9%. The interest is paid either annually or cumulatively.

TAXATION

The interest earned is added to the income and taxed according to the investor's income tax bracket. No tax is deducted at source if the annual interest is less than Rs 2,500.

Since investment in these bonds offers income tax deduction above the Rs 1,00,000 limit under Section 80 C, investors can opt for them if they have already exhausted the former limit.

"Investors can avail of additional tax benefits on investment up to Rs 20,000, and therefore, they must avail of this option," says Harish Sabharwal, chief operating officer, Bajaj Capital.

Capital Gain Bonds

Long-term capital gain is the gain that is derived out of a sale of an asset that has been held for more than a year. You can invest the gain in certain specified bonds to claim tax exemption within 6 months of the date of sale of the asset. Save tax on long-term capital gains by investing in 54EC bonds such as REC capital gain bonds, NHAI capital gain bonds respectively. Budget 2018 has proposed to amend the 54EC section of the Income Tax Act wherein capital gains arising only from the sale of assets such as land or building or both will be considered for tax exemption. It has also proposed to increase the lock-in period to 5 years from 3 years. This amendment will take effect from 1st April 2019.

Key Features of Capital Gain Bonds specified under Section 54EC:

1. Non transferable and non negotiable bonds

2. No TDS but interest earned is taxed

3. AAA credit rating by ICRA, CRISIL and India Ratings and Research Private Limited

4. Maximum investment is Rs. 50 lakh

5. Maximum of 500 bonds can be bought at Rs. 10000 per bond

6. Annual interest rate at 5.75%

7. Tenure of the bond is 5 years

8. Available in Physical as well as demat form

The Analysis

According to section 54EC of I.T., any person (individuals, HUFs, partnership firms, companies etc.) can avail exemption in respect of long-term capital gains (arising from the sale of a long-term capital asset other than equity shares and securities), if the capital gain is invested in Capital Gain bonds. The exemption will be the amount of capital gain or the amount of investment made, whichever is less.

The interest rate offered on these bonds is 5.75% per annum. The exemption is subject to:

• The investment is made within a period of 6 months from the date of transfer of the asset

• Lock-in period to 5 years from 3 years. This amendment will take effect from 1st April 2019

• Bonds sold, transferred or converted into money or any loan or advance taken on the security of such bond within a period of 3 years from the date of acquisition, the capital gains earlier exempt are taxable in the year of sale or transfer of the bonds

• Maximum investment limit of up to Rs. 50 Lakhs in a Financial Year per individual.

• If the amount invested in bonds is less than the capital gains realized, only proportionate capital gains would be exempt from tax.

Those who wish to save taxes on LTCG can invest the amount in the capital gains bonds within six months from the date of arising profit. By investing in 54 ec Capital gain bond one can save up to Rs 50 Lakh in a single financial year. These instruments are not only capital protected instruments, but they also provide a steady stream of income to you. At Karvy, you can invest in Capital Gain Bonds.

Bond offered (under sec 54 EC):

REC Long-term bond

Rate of Interest: 5.75% pa (effective – April 02, 2018)

Tenure: The tenure of the Bonds will be 60 Months and Bonds will be automatically matured at the end of the period, from the deemed date of allotment.

Power Finance Corporation (PFC)

Rate of Interest: 5.75% pa

54EC Bonds: Get Paid To Save Tax

TAX Exemption under Section 54 EC:

1. Section 54 EC bonds can be used to save tax only when the capital gain is derived from land or building or both.

2. It cannot be used to save tax on capital gain arising from the sale of non-equity mutual funds, debentures, gold jewelry or gold ETFs.

3. The maximum investment in these bonds is Rs. 50 lakh only. As the property prices have soared high, this provision does not provide adequate relief for the investor.

54EC BONDS FAQs:

Q: Which bonds are eligible under the Section 54 EC?
A: REC (Rural Electrification Corporation) and NHAI (National Highways Authority of India) are the bonds eligible under Section 54 EC.

Q: What is the maximum investment limit for the Section 54 EC- Capital Gain Bonds?
A: Rs. 50 lakh is the maximum amount that can be invested in these bonds.

Q: What is the rate of interest for these bonds?
A: 5.75% is the interest rate offered by these bonds.

Q: What is the lock-in period for investment?
A: The lock-in period will be 5 years with effect from April 1, 2019.