Capital gains on sale of property attracts a long term capital gains tax of 20 per cent. However, if you do not wish to pay the capital gains tax, then you have to place the entire profits under 54EC capital gains bonds issued by the National Highways Authority of India or the Rural Electrification Corporation.
The face value of these bonds are Rs 10,000. An amount of Rs 10,000 is payable on application. The only problem with these bonds is that they offer a very low interest rate of six per cent. The interest on these bonds are paid semi-annually.
There is a lock-in period for these bonds and one cannot sell these bonds until three years. Since the capital gains bonds are issued by government owned entities they are generally considered safe for investment.
Assume you purchase a property for Rs 25 lakhs in 2007 and sell the same for Rs 50 lakhs in 2013. Then you have to pay a capital gains on Rs 25 lakhs after working out the actual sale price after indexation. Assume that after indexation your profit is Rs 10 lakhs. Then the Rs 10 lakhs profit has to be invested in the section 54EC bonds. You could also partially invest the sum, but in that case the remaining amount will attract a capital gains tax.
The bonds it may be noted are non transferable for the three year period, apart from the lock-in. Capital gains bonds under section 84EC are an extremely good option to save capital gains tax and must be considered by investors to avoid profits being taxed.