{"id":16808,"date":"2021-07-17T06:42:00","date_gmt":"2021-07-17T06:42:00","guid":{"rendered":"https:\/\/trainingcentral.co.in\/portal\/?p=16808"},"modified":"2025-05-07T06:41:48","modified_gmt":"2025-05-07T06:41:48","slug":"all-you-wanted-to-know-about-54ec-bonds","status":"publish","type":"post","link":"https:\/\/trainingcentral.co.in\/portal\/all-you-wanted-to-know-about-54ec-bonds\/","title":{"rendered":"All You Wanted To Know About 54EC Bonds"},"content":{"rendered":"\t\t
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In<\/em>vestments can help you get exemptions of up to \u20b950 lakh per year in capital gains tax<\/i><\/p>\n

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A popular option for saving long-term capital gains tax on sale of property is section 54EC bonds. Investing in these bonds can help you make gains of up to \u20b950 lakh per financial year from capital gains tax. However, there is a lock-in period of five years. This used to be three years earlier. These bonds carry interest, which is currently at 5 per cent and is taxable. Let us compare the returns from these two options.<\/p>\n

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Assume, for instance, that there is long-term capital gains of \u20b950 lakh that is taxable, after indexation benefit as applicable. A sum of \u20b950 lakh invested in 54EC bonds would fetch a defined return of 5 per cent per year. This coupon\/interest is taxable at, say, 30 per cent (your marginal slab rate), ignoring surcharge and cess for simplicity. Hence your return, net of tax, is approximately 3.5 per cent. As against this, if you go for option (b), you pay tax on capital gains, which is taxable at 20 per cent if we ignore surcharge and cess, for simplicity. Subsequent to paying the tax of \u20b910 lakh, what remains with you for investment is \u20b940 lakh. Let us now look at a few options for investing \u20b940 lakh.<\/p>\n

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Tax-free PSU bonds<\/strong><\/p>\n

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Since there are no fresh issuances of tax-free PSU bonds and interest rates have eased, the yields available in the secondary market are lower than earlier. For our comparison, we assume a yield (i.e. annualised return) of 4.25 per cent for investing in tax-free PSU bonds. \u20b950 lakh invested in 54EC bonds, compounding at approximately 3.5 per cent per year, grows to \u20b959.38 lakh after five years. \u20b940 lakh, which is the net amount that remains in case of option (b), invested at 4.25 per cent tax-free, grows to \u20b949.25 lakh after five years. Hence, investing in 54EC bonds at 5 per cent (pre-tax) is a better option than paying the LTCG tax and investing the remaining amount.<\/p>\n

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Bank AT1 perpetual bonds<\/strong><\/p>\n

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There is a negative perception about perpetual bonds after the YES Bank fiasco. The risk factors that got highlighted after the YES Bank AT1 write-off have always existed, but came into action and hit investors. Having said that, there are front line banks such as SBI, HDFC Bank and the like that are worth investing in.<\/p>\n

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The range of yields in bank AT1 perpetual bonds is wide. We assume 7.5 per cent to strike a balance between risk (higher yield but higher risk) and reward (lower yield but lower risk). Taxation at 30 per cent means a net return of approximately 5.25 per cent. Against \u20b959.38 lakh in case of 54EC bonds, \u20b940 lakh invested at 5.25 per cent grows to \u20b951.6 lakh after five years. Though somewhat higher than the \u20b949.25 lakh from tax-free bonds, this is lower than the \u20b959 lakh from 54EC, bonds making the latter a better option.<\/p>\n

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Equity<\/strong><\/p>\n

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It is not fair to compare investments in bonds with equity. However, to get a perspective we will do a comparison. We will talk of the break-even rate now. Let us say, equity gives X per cent return over five years, and that is taxable at 10 per cent, which is the LTCG rate for equity for a holding period of more than one year. If \u20b940 lakh invested in equity yields a return of 9.15 per cent per year pre-tax, which is 8.24 per cent net of tax per year, it grows to \u20b959.4 lakh after five years. Hence the break-even rate for \u20b940 lakh to outperform \u20b950 lakh over five years, at 3.5 per cent net of tax, is 8.24 per cent net of tax.<\/p>\n

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Conclusion<\/strong><\/p>\n

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Equity returns are non-defined and the break-even rate calculated for this asset class to outperform 54EC bonds is 8.24 per cent net of tax. It is difficult for bonds as it will be possible only for a bond with inferior credit quality against a AAA rated PSU one. Equity or a riskier bond not being a fair comparison, it is advisable to save the tax and settle for 5 per cent by investing in 54EC bonds. However, liquidity is one aspect you may keep in mind \u2014 investment in 54EC bonds is locked in for five years.<\/p>\n

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Refer: https:\/\/www.thehindubusinessline.com\/portfolio\/personal-finance\/all-you-wanted-to-know-about-54ec-bonds\/article35381540.ece<\/a><\/p>\n

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Investments can help you get exemptions of up to \u20b950 lakh per year in capital gains tax A popular option for saving long-term capital gains tax on sale of property is section 54EC bonds. Investing in these bonds can help you make gains of up to \u20b950 lakh per financial year from capital gains tax. However, there is a lock-in period of five years. This… <\/p>\n

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