Monday July 29, 11:45 AM
RBI Bond comes out tops |
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By Personalfn.com
Investors who wish to save on capital gains tax have a range of investment options, under 54 EC. However, they would be well-advised to look at RBI Relief Bonds instead.
If person makes a long-term capital gain and he wants to save capital gains tax u/s. 54EC, he can invest in one of the three bonds given below:
- Rural Electrification Corporation (REC),
- National Highways Authority of India (NHAI),
- National Bank of Agricultural and Rural Development (NABARD)
Over here we have made an attempt to highlight how investing the capital gain in 8% Relief Bonds could be more tax efficient and a safer avenue than the 54EC Bonds. Lets take an example of `A' and `B', both of them have made a long- term capital gain of Rs 100,000 each and are in the highest tax bracket. `A' chose to invest Rs 100,000 in REC bond (to avail of 54EC) to save capital gains tax (REC offers approximately the same rate of return along with the other two bonds). However, `B' prefers to pay the capital gains tax and invests the remaining Rs 90,000 in 8% Relief Bonds.
A's investment in REC Bonds
| Investment Amount (Rs) |
100,000 |
| Tenure (Yrs) |
5 |
| Yield to Maturity(%) |
8.17% |
| Maturity Value (Rs) |
148,093 |
| Interest Income (Rs) |
48,093 |
| Tax paid on interest@30% |
14,428 |
| Maturity Value after tax (Rs) (a) |
133,665 |
| Tax saved on cap gains (Rs) (b) |
10,000 |
| Effective maturity value(Rs) (a+b) |
143,665 |
'A' invests his entire capital gain of Rs 100,000 in REC Bond for 5 years, which offers 8% p.a. on the principal and 9% on the accumulated interest rate. The actual yield to maturity (YTM) works out to be 8.17%, which is considered in the above table. The maturity value of the investment after 5 years comes to Rs 148,093 out of which Rs 48,093 is the interest income earned on the investment, which is fully taxable in the hands of 'A'. The post tax maturity value would be Rs 133,665 (Rs 14,428 paid towards tax at the rate of 30% on the interest income i.e. Rs 48,093). However, 'A' has effectively saved long-term capital gains tax of Rs 10,000 (10% of the capital gain i.e. Rs 100,000) because he invested his funds in REC 54EC bond. So for 'A' the effective maturity value is Rs 143,665, which he has earned on his capital gain investment after 5 years.
B's investment in Relief Bonds
| Capital Gains (Rs) |
100,000 |
| Capital gains tax paid @ 10% |
10,000 |
| Investment Amount (Rs) |
90,000 |
| Tenure (Yrs) |
5 |
| Rate (%) |
8.00% |
| Maturity Value (Rs) (a) |
133,222 |
| Tax saved on interest income(Rs) (b) |
14,428 |
| Effective maturity value(Rs) (a+b) |
147,650 |
'B' decides to invest in 8% tax fee Relief Bonds. So he pays the capital gains tax of Rs 10,000 (10% of the capital gains i.e. Rs 100,000) and invests the remaining Rs 90,000 in the 8% tax free Relief Bonds for a period of 5 years. The maturity value of the investment after 5 years comes to Rs 133,222 out of which Rs 33,222 is the interest income earned on the investment, which is tax free. However, unlike 'A' where he had to pay tax on the interest income of Rs 14,428 for his investment in REC, 'B' does not have to pay any tax. So he has effectively saved Rs 14,428, which 'A' had to pay on his investment. For 'B' the effective maturity value is Rs 147,650, which he has earned on his capital gain investment after 5 years.
So if we compare the investments of both investors, 'B' stands out more profitable by
Rs 3,985 as compared to 'A'. Also, investments in Relief Bonds have a higher comfort level where safety is concerned vis-à-vis REC Bonds as the former are guaranteed by the Government of India. However, Relief Bonds have a maximum investment limit of Rs 200,000 p.a. So if an investor has a capital gain of more than Rs 200,000 he can invest only upto Rs 200,000 in his name as the first holder in Relief Bonds and the remaining in REC Bonds. Alternatively, if he wants to invest the excess amount in Relief Bonds, he can invest in his family members name (provided they haven't exceeded the Rs 200,000 limit).
So while REC Bonds should ideally be the avenue to park your capital gains, investors must first look at RBI Bonds for higher returns and more safety.
If you are in Mumbai and are interested in investing in fixed income instruments, mutual funds or other investments, please register here.
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