If you’re selling your house then gains can be taxed as high as 20%, however, reinvesting the sum in 54 EC Capital Tax bonds not only saves this LTCG tax but also earns a coupon rate on the sum invested

While on one hand, interest paid on a house loan is permissible for tax relaxation, any capital gains due to selling of property are taxed. In fact, sale of any long-term capital asset such as house, gold, bonds or mutual on which you make a profit is taxable after indexation. 

However, there are ways through which one can lower their tax burden and put some money for the nest egg. Especially if you’re selling the house then realised gains are substantial and can be taxed as high as 20%. However, if you reinvest these gains back you won’t have to pay taxes

Gains realised are substantial in case you’re selling a house and can the tax on same can be saved by investing the proceeds in 54EC Bonds which are also known as Capital Tax Gain Bonds as investments in these are eligible for deductions under section 54EC of the Income Tax Act. Under this section, the taxpayer is guaranteed an exemption of long term capital gains (LTCG) on sale of long term capital assets if gains are reinvested within 6 months from the date of transfer for a minimum period of three years. 

There are usually AAA-rated bonds on which do not allow any tax exemption on short-term capital gains tax. The long-term investment instruments are offered under the category by Public Sector Units (PSUs) such as REC (Rural Electrification Corporation Ltd), PFC (Power Finance Corporation Ltd) and NHAI (National Highways Authority of India) and IRFC (Indian Railways Finance Corporation Limited). The minimum limit is Rs 20,000 and Rs 10,000 in 54EC bonds offered by REC and NHAI respectively. 

Lower interest rates and relaxation in due date

However, owing to declining interest rates, both NHAI and REC Ltd have reduced the interest rates on their capital bonds from 5.75% to 5% from August 1, 2020. The new rates will be applicable to fresh bonds and will not apply to issued earlier than August 1.

The 6-month limit or the due date to reinvest the LTCG in 54EC bonds to get a deduction has been relaxed too. Any due date between March 20 and September 29 has been relaxed to September 30.

For example, if you sold your house on 15 November and the due date for reinvesting your gains in order to get tax exemption would fall on May 15, then the same would be relaxed to September 30.  These instruments have a lock-in period of five years and the returns on the sum invested under 54EC bonds are taxable.