NHAI 54EC OR Capital Gains Bonds – Tax Benefits, Interest and Tenure

NHAI 54EC BONDS 

In the investing space, we see options and instruments being broadly classified in two categories, one which offers fixed income and another having market-linked returns or income. The former comprises government bonds, T bills, Debentures among others, and the latter comprises mutual funds, shares, etc. In this article, we will talk about a fixed-income investment option which is a Bond from section 54 EC bonds, called National Highways Authority of India Bonds often called NHAI bonds. This article will start from the very basic, explaining bonds and Sec 54EC and then we'll talk about different aspects of the NHAI bond. An investor will be able to make a sound decision after reading this article. 

WHAT ARE GOVERNMENT BONDS?

These are debt instruments issued by the government (State or Central) whenever they face a liquidity crisis and require funds for the development of infrastructure. These fall under the broad categories of bonds and government securities and are predominantly for long tenure ranging between 5 to 40 years. In simple words, these bonds are contracts between the issuer and the investor where the government guarantees interest and returns on the face value of bonds held by investors along with repayment of the principal amount on a future date.

WHAT ARE SECTION 54 EC BONDS?

54EC bonds also called and known by Capital Gains tax exemption bonds are investment options which allow exemption under sec 54 EC of the Income Tax Act, 1961. These are offered to investors who accrued LTCG from the sale of building or land or both and would like to avail exemption from taxes on these gains. This further contains two bonds, one from the National Highway Authority of India (NHAI) and Rural Electrification Corporation Ltd (REC). The minimum cap for investment is rs 20,000 for REC and Rs. 10,000 for NHAI, while the maximum limit stands at Rs. 50,00,000 per financial year. Both of these offer a coupon rate of 5.00% p.a. (as of 01 August 2020 onwards), payable annually, and a lock-in period of 5 years with no transferability. These AAA-rated bonds are backed by the government and therefore the risk of capital payment and interest is secured.

To summarise, here is a brief table for NHAI bonds from Sec 54EC

KEY FEATURES OF NHAI 54 EC BONDS

Except for the primary tax-saving benefit of these bonds, let’s talk about other key features.

1. Safety:

These bonds are backed by the government and also AAA/stable rated by CRISIL which makes sure that these are safe and secure.

2. Interest/Returns:

Interest accrued in these bonds are taxable and no TDS is deducted on the same. Also, wealth tax is exempted. 

3. Tenure:

These bonds come with a lock-in period of 5 years effective from April 1, 2018, with no transferability. 

4. Coupon Rate:

These offer a coupon rate of 5% per annum payable annually. (as on 01 August 2020 onwards)

5. Amount:

As discussed, the minimum investment in NHAI bonds is Rs. 10,000 and the maximum cap is at Rs 50,00,000.

BENEFITS OF NHAI 54 EC BONDS

1. Tax Saving:

LTCG from investments in 54EC NHAI bonds or sale of 54EC bonds can be reinvested so as to save tax.

2. Security:

As these bonds are backed by the government, the associated risk automatically gets mitigated and makes them absolutely secure to invest in. 

3. Holding:

These bonds can be conveniently held by investors according to their preference in either demat or physical form.

4. Save while you earn:

Investing in 54EC NHAI bonds allows an investor to save tax as well as earn through returns and interest from the same.

HOW NHAI 54 EC BONDS ALLOW TAX SAVINGS?

The provision of section 54EC from the Income Tax Act 1961 allows an investor to save LTCG arising from transfer of any capital asset if:

1. Such investment is held for at least 3 years.
2. The whole of capital gain accrued is reinvested within six months from the date of transfer in eligible bonds.
3. To avail of this exemption, the bonds should not be transferred or converted into any loan or money or advance can be taken on security of such bond within 3 years from the date of acquisition else the benefit will be withdrawn.
4. If the amount invested in bonds is less than the capital gains realized, only proportional gains would be tax-exempt.

WHY INVEST IN NHAI 54 EC BONDS?

The features and benefits discussed above provide a clear reason for investing in NHAI bonds. Tax exemption on capital gains, 5.00% coupon rate, 100% risk-free payment, and a minimum of Rs. 10,000 and a maximum of 50 lakhs investment clubbed together are a great deal for conservative investors who have less risk appetite. 

FAQs

1. What are the bonds offered in 54EC?

The bonds offered are RECL bonds and NHAI bonds. 

2. What is the latest coupon rate on NHAI bonds?

As of 01 August 2020 onwards, It’s 5.00% p.a.

3. Are these 100% risk-free?

Yes, as they are backed by the government so repayment of principal along with the interest is certain. 

4. What is the rating of NHAI bonds?

These bonds are rated AAA/Stable by CRISIL.

5. What is the lock-in period for NHAI bonds?

The lock-in period for the NHAI bond is 5 years.