We love to Save taxes and one of the ways to save on Long term Capital Gains Tax on Real Estate is to invest in Capital Gains Tax Saving Bonds from NHAI or REC.
Below are few rules to avail this tax exemption:
1. Only Long Term capital gains from Real Estate are eligible to be invested in these bonds
2. You can invest capital gains up to Rs 50 lakhs in these bonds
3. These bonds give interest of 5.75% and have maturity tenure of 5 years [changed from 3 to 5 years in Budget 2018]
4. The tax exemption is covered under section 54EC of Income tax
5. The interest earned on the bonds are taxed according to your marginal income tax slab
Economic Times today (February 27, 2017) published an article “Tax Savings That Do not Actually Help Save Much” by Dhirendra Kumar who is CEO, Value Research which recommends you should not invest in Capital Gains bond to save tax. Here is a snapshot:
Do you think this is right logic?
Also Read: How are your Investments Taxed?
Capital Gain Bonds – Should You Invest?
We did our calculation and here it is.
Amit has Long Term Capital Gains on sale of Property of Rs 50 Lakhs and he has two options
- Invest in Tax Saving Bond and Capital Gains OR
- Pay Capital Gains tax and invest the rest
The table below covers both the scenarios
As you can see with people in highest tax bracket of 30%, need to make at least 12% after tax returns to get what they would get after saving capital gains though capital gains bonds! This number would be higher for people in lower tax brackets!
I think it’s difficult to earn 12% post tax returns in 3 years for most and hence capital gains saving bonds make complete sense to save capital gains tax.
I published this post just to bring to your attention that NOT everything you read in Newspapers or Blogs (including apnaplan.com) may be correct. Keep in mind it’s your hard earned money and hence check and double check before you make any investment decision!