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Sold your property? Save Tax by Buying Bonds

If you sell your property "within 3 years" of the date of purchase, you have "no option" but to pay per your slab rate.

But, if you sell your property "after" 3 years, you can save tax by investing the profits in another property. However, if you don't want to buy another property, you can still save tax by buying certain specified bonds.

- These specified bonds - under section 54EC - are issued by National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC)
- You can invest maximum Rs.50 lakhs in these bonds in a year
- Only the gains have to be invested
- Investment should happen within 6 months from the date of sale
- These bonds have a lock-in of 3 years
- Interest on these bonds is presently 6% p.a. and is taxable

There is one question people normally ask. Since the interest on these bonds is so low...and taxable too...wouldn't it be better to pay the tax and invest the balance amount in some high-yielding investments?

The answer will vary from case to case depending on the gains, time period, indexation benefit, your tax slab etc. But, let me discuss a generic example. The logic thereof can then be applied to work out the right answer for specific cases.

Suppose you bought a property in 2002-03 for Rs.10 lakhs and sold it in 2011-12 for Rs.50 lakhs. On this gains of Rs.40 lakhs you have to pay Rs.4 lakhs (@10%) as capital gains tax. [Note: For simplicity I am ignoring the indexed cost method, which in this example is anyway working out to a higher tax amount - and hence not to be considered].

Now you have two options -
Option A: Either pay Rs.4 lakhs tax and you are free to invest the balance profit of Rs.36 lakhs anywhere you like
Option B: Invest the gains of Rs.40 lakhs in the 54EC bond at 6% interest

Assuming you are in the 30% tax bracket, your Rs.40 lakhs invested in 54EC bond will give you a post-tax sum of about Rs.45 lakhs on maturity after 3 years. This means that if you go for Option A, you would have to earn around 11% returns on Rs.36 lakhs so that you have at least the same amount i.e. Rs.45 lakhs after 3 years. Can you earn "safe and assured" 11% returns or more? If yes, Option A is better for you. If not, it would better to stick to Option B. 

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