Capital Gain Bonds are bonds notified under Sec. 54EC of the Income Tax Act’ 1961 by investing in which the profits arising from the sale of a Long Term Capital Asset (Land/Building or both) would be exempt from tax subject to certain conditions.

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Under Section 54EC, capital gains are those that arise from the transfer of long term capital asset being land/building or both.

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 No. Only Long Term Capital Gains qualify under this scheme.

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 Land and Buildings qualify as long-term capital asset if held for more than 24 months.

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 The gains have to be invested in the bonds within 6 months of such realisation or before the filing of IT returns. Such benefits cannot be split into two financial years

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 The bonds are redeemable after 5 years. This is a lock-in period.

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 The capital gains have to be invested in specified long term assets, via bonds. These bonds are generally issued by National Highway Authority of India (NHAI) or by the Rural Electrification Corporation Ltd.

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The interest rate on these bonds is notified by the Government from time to time. Currently, the interest rate is 5.25% pa.

Is there a limit on invested amount

The investor can invest the whole or part of the capital gains realised with a minimum investment of Rs. 20,000 and a maximum of Rs.50 Lacs per financial year.

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 Yes, the interest on these bonds is liable to tax on an accrual basis as per the income-tax slab of the assessee. TDS is not applicable.

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The face value of the bonds is Rs.10,000/-

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The investor can invest the whole or part of the capital gains realised with a minimum investment of Rs. 10,000 and a maximum of Rs.50 Lacs per financial year. 

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The bonds can be converted into cash before the stipulated time. However, the amount exempted under Section 54EC will automatically be deemed as long-term capital gains for the previous financial year and will subsequently incur tax at the applicable rate. The same scenario applies if a loan is taken against the bonds.

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If the individual is not able to invest in the bonds within 6 months, he/she can deposit such amount in a specified deposit of a PSU bank and claim the same tax exemptions. However, such deposits must be converted to an investment within 2 years, or else Short Term Capital Gains apply.

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