Tuesday, December 6, 2022
HomeMutual FundAfter promoting my flat ought to I purchase 54EC Tax Exemption Bonds...

After promoting my flat ought to I purchase 54EC Tax Exemption Bonds or pay tax and put money into fairness? 

A reader writes, “We’re about to promote our flat. Lots of my buddies advise me to purchase 54EC Capital Achieve Tax Exemption Bonds to save lots of tax after which make investments the cash. Nonetheless, I’m wondering if paying the tax and investing the remaining in fairness is healthier. Are you able to please do a comparability research? Due to your articles, all my monetary targets are in place, and I’m usually investing for them.”

54EC Capital Achieve Tax Exemption Bonds can be utilized to keep away from tax on long-term capital positive aspects arising from promoting property, shares, mutual funds and many others. The bond must be bought inside six months of receiving the capital achieve proceeds. The lock-in interval is 5 years, and the bond’s rate of interest is taxable as per slab. The utmost quantity that may be bought is Rs. 50 lakhs.

There are two features to paying tax and investing vs not paying tax and investing after 5 years comparability.

  • Emotional: That is crucial side. Most individuals can’t deal with their month-to-month revenue tax deductions at supply. So they’re unlikely to pay a number of lakhs of tax after an actual property sale (the commonest use case). So for them, the selection is straightforward: Purchase 54EC Capital Achieve Tax Exemption Bonds and get on with it.
  • Technical: This is applicable to the uncommon few who can take an goal resolution.

In what follows, we’ll current a technical comparability of the 2 decisions understanding full properly that most individuals would look to keep away from “quick loss” attributable to tax and purchase the bonds.


  • Quantity of capital positive aspects: Rs. 50 lakhs
  • Coupon Price of 54EC Capital Achieve Tax Exemption Bonds: 5% We’ll use the price of the most recent REC concern.
  • The tax price on long run capital positive aspects is 20% with indexation. We’ll assume the property was bought in FY 2017-2018 and offered in FY 2022-23. So the efficient tax price is 16.68%. For an in depth illustration, see: Taxation of worldwide mutual funds defined with an instance.
  • We’ll assume the overall revenue from all sources, together with curiosity from the part 54EC bonds, is Rs. 15 Lakhs. Such an assumption is important to find out the slab price precisely.
  • Beneath the brand new tax regime, the related tax rule is “₹125000 + 25% of whole revenue exceeding ₹12,50,000”. So the efficient tax price is 13%. So we will assume 13% of the curiosity accused from the bonds will probably be misplaced to tax and never obtainable for additional compounding.
  • So the post-tax bond rate of interest is  5%*(1-13%) = 4.35%. If we merely assumed a 25% slab price with a 4% cess, we might get a post-tax price of three.7%, which is inaccurate in our opinion.

Situation 1: We purchase part 54 EC bonds value Rs. 50 lakhs for 5 years. The post-tax corpus is Rs. 61.86 Lakhs.

Situation 2: We pay tax on Rs. 50 lakhs. The remaining corpus is Rs. 41.66 Lakhs. That is now invested for 5 years. What’s the post-tax price of return required to no less than get Rs. 61.86 Lakhs? Reply: 8.23%

There are numerous “fairly secure” funding choices the place post-tax 8.23% is attainable over 5 yearsDoable, not possible or possible (we don’t know that) and definitely removed from a assure.

  • Conservative hybrid funds
  • Balanced benefit funds
  • Company Bond funds
  • Fairness financial savings funds

Assuming we’re not adventurous sufficient for direct fairness, fairness funds or aggressive hybrid funds.

Liquidity is a side most individuals ignore. A five-year lock-in interval is sort of nice for an individual with a sturdy revenue and funding schedule for targets. Others might have entry to the cash at any time, so bonds is probably not a good suggestion for them. Once more, feelings would stop us from pondering this fashion.

There are numerous traders who “imagine” that they’ll simply make greater than 8.23% (post-tax) over 5 years. That is completely nice, and so they can actually keep away from the bonds and work the capital instantly, offered they don’t drown in remorse if issues go awry. If I have been within the reader’s place, I might be tempted to do that.

When you’ve got any doubts, then take the straightforward route of avoiding the tax with the bonds. Nonetheless, make sure you don’t want this cash for 5 years.

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