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Government Bonds /Capital Gain Bonds

Government Bonds

A government bond is a debt instrument issued by the Central and State Governments of India. Issuance of such bonds occur when the issuing body (Central or State governments) faces a liquidity crisis and requires funds for the purpose of infrastructure development.

Government bond in India is essentially a contract between the issuer and the investor, wherein the issuer guarantees interest earnings on the face value of bonds held by investors along with repayment of the principal value on a stipulated date.

Who Should Invest in Government Bonds?

• Government Bonds are one of the most secure forms of investment in India attributed to its Sovereign guarantee. Risk-averse investors who prefer superlative security of their investments devoid of uncertainty created present in market-linked instruments can look to invest in this type of securities.
• It is also a suitable long term investment option for entities that do not have experience in investing in stock market tools.
• Individuals seeking to dilute the risk factor in their overall investment portfolio while also ascertaining higher than average returns on their investments can allocate a stipulated portion of their corpus for investment in Government Bonds as well.

Hence, entities seeking to dilute or diversify their investment portfolio or starting their venture as investors can consider investing in government bonds, the excess corpus they have.

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Capital Gain Bonds

54EC bonds, or capital gains bonds, are one of the best ways to save long-term capital gain tax. 54EC bonds are specifically meant for investors earning long-term capital gains and would like tax exemption on these gains. Tax deduction is available under section 54EC of the Income Tax Act.

54EC bonds do not allow any tax exemption on short-term capital gains tax. Invest in 54EC bonds to get benefits of tax deduction.

The eligible bonds under Section 54EC are REC (Rural Electrification Corporation Ltd), PFC (Power Finance Corporation Ltd) and IRFC (Indian Railways Finance Corporation Limited).

Key Features of 54EC Bonds

54EC bonds are popular investment instruments as investing in 54EC bonds allows investors to claim tax deductions on long-term capital gains. 54EC bonds also offer other features.

• Safe and Secure: 54EC bonds are AAA rated.
• Interest: Interest on 54EC bonds is taxable. No TDS is deducted on interest from 54EC bonds and wealth tax is exempted.
• Tenure: 54EC bonds come with a lock-in period of 5 years (effective from April 2018) and are non-transferable.
• Investment amount: Minimum investment in 54EC bonds is 1 bond amounting to Rs. 10,000 and the maximum investment in 54EC bonds is 500 bonds amounting to Rs 50 lakhs in a financial year.
• Interest Rate: 54EC bonds offer 5.25% rate of interest payable annually.

Who are eligible to Invest?

The exemption under Section 54EC can be claimed by any taxpayer, including

• Resident and Non-Resident Individuals
• Hindu Undivided Family (HUF)

Why you should invest in Capital Gains Bond?

• Capital Gains Tax Deferral: By investing in Capital Gains Bonds, you can defer the payment of capital gains tax, which helps in managing your cash flow more efficiently.
• Stable Returns: The fixed interest rate offered by these bonds ensures stable returns, however combined with the capital gain tax saved returns are comparable to other market investments.
• Low Risk: Capital Gains Bonds provide an opportunity for relatively safe investments since they are issued by government entities and rated 'AAA' by credit rating agencies.
• Long-Term Investment Option: If you have a long-term investment horizon and want to reduce your tax liability, Capital Gains Bonds can be an excellent choice. They offer tax benefits while providing a reliable investment option.