There is option available to save some taxes by investing in capital gains bonds. These are known as Section 54EC bonds because the benefit for the investor comes under this section. There are a few factors that need to be considered while looking at investments in these bonds.
The face value of the bond is very important. There are only a couple of financial institutions that can issue this bond and these are the Rural Electrification Corporation (REC) and the National Highway Authority of India (NHAI).
The face value of these bonds is not low and the investor will need to spend a certain minimum amount.
The face value is generally Rs 10,000, so for an investor wanting to save Rs 8,000 on capital gain will still have to purchase this one bond to get the benefit.
Low interest rates
The investor should not consider this bonds from the point of view of the returns that they will generate. The rate of return will not be high and it currently averages around 5.5 - 5.75 per cent.
The figure is low, especially when one considers tax to be paid on this amount and hence the returns should not be the main feature of this investment.
The return is kept low because investors have no choice but to invest in these bonds as they want to save capital gains and there is no other alternative available in the market.
Lock in period
Another factor that has to be considered about these bonds is the lock in period. This will be for 3 years. The lock in has to be differentiated from the tenure of the bonds that can be higher. This means that the bond can be in existence for a period of 5 years but for 3 years the investor cannot exit the bond.
Further, at the end of this period one has to see carefully as to who has the right to redeem the bond and the steps that needed to be taken for the purpose.
Usually a redemption request has to be given a month or two in advance for the necessary option to be exercised.
There is another problem that the investors will face if there is a very large capital gain and they wish to save the entire amount through purchase of these bonds.
This is because the maximum amount that can be invested in these bonds has been capped at Rs 50 lakh so that the investor cannot invest more than this. This becomes a restricting factor that has to be considered while taking the investment decision.