Should You Purchase Capital Gain Bonds from NHAI & REC to Save Tax?

Have you recently sold a property and are in a fix? Are you unsure whether to purchase Capital Gain Bonds from NHAI & REC to save tax? There are 3 choices here from which you can take your pick.

1. Purchase another real estate from long term capital gain amount
2. Purchase Capital Gain Bonds from NHAI & REC to save tax
3. Pay long term capital gain tax and invest the remaining amount in equity/debt instruments

We are going to talk only about long-term capital gains. How much are the capital gains – You can check it with your CA instead of calculating it on your own.

This article is all about whether you should purchase Capital Gain Bonds from NHAI & REC to save tax.

Let us assume that you sold a property recently and your long-term capital gains are 50 Lakhs. For your kind information, 50 Lakhs is the limit or the maximum amount. You can simply invest in capital gain bonds to save tax.  Let us check all the options one by one to facilitate a better understanding.

Purchase Another Real Estate from Long Term Capital Gain Amount

Suppose you’re a hardcore real estate fan and the only solution that seems best is to purchase another real estate. So, if buying another property appears to be the only viable solution, then go for it. In such a case, there is no need to purchase Capital Gain Bonds from NHAI & REC to save tax.

But if you’re looking for risk vs returns by investing in capital gain bonds, here are the calculations for you.

But before moving forward – let’s see how much the tax rates on long term capital gains on sale of property are. We will also determine the interest rates on NHAI and REC capital gain bonds.

Long-term Capital Gain Tax on Sale of Property in India For FY 2020-21 and AY 2021-22

Long-term capital gain tax on sale of property in India for FY 2020-21 and AY 2021-22 is 20.8%. For example, if long-term capital gains are 50 lakhs, you will have to pay tax of 10.40 Lakhs. Take note that this tax amount is inclusive of cess (with indexation).

Capital Gain Bonds Interest Rates – 2020-21 (NHAI and REC interest rates)

Capital Gain Bonds Interest Rates are 5% and the amount is paid annually. The lock in period is 5 years. Also, the interest received is taxable.

Purchase Capital Gain Bonds from NHAI & REC To Save Tax

Let us do some calculations

Long term capital gains amount – Rs. 50,000,00

Interest Rate – 5%

Interest for 1^st year @ 5% – Rs. 2,50,000

Interest for 2^nd year @ 5% – Rs. 2,50,000

Interest for 3^rd year @ 5% – Rs. 2,50,000

Interest for 4^th year @ 5% – Rs. 2,50,000

Interest for 5^th year @ 5% – Rs. 2,50,000

Value at the end of 5 years – Rs. 62,50,000

This would be the value after 5 years. Here, I have assumed that you would not be investing the annual receivable amount of 2.50 Lakhs.

Suppose you invest this 2.50 Lakhs every year (even in debt instruments). In this case, you would be receiving 14 Lakhs at the end of 5 years (assuming 6% returns).

So, the total amount receivable would be 64 Lakhs after 5 years.

Well, why have I not included the tax payable from annual amount of 2.50 Lakhs? We will discuss that at the end of article.

Now, let us come to the part of paying tax.

Pay Long term Capital Gain Tax aInvest The Remaining Amount In Equity/Debt Instruments

Long term capital gains amount – Rs. 50,000,00

Tax rate – 20.8%

Tax Paid – Rs. 10,40,000

Remaining Amount – 39,60,000

Now what rate of returns is required to achieve 64 Lakhs (as mentioned above)? By investing 39.60 lakhs, that too in 5 years.

It would be around 10%, i.e. every year, you need to generate 10% returns. This is the only way to achieve 64 Lakhs by investing 39.60 lakhs in 5 years.

Is it feasible to generate 10% returns by investing the amount in FDs or debt instruments? The answer is a big NO.

Is it feasible to generate 10% returns by investing the amount in equity instruments? The answer may be yes or no, I do not know. But investing in equity would involve greater risk. You can get 10% or 12% returns, but your returns might go in negatives too. This involves a much bigger risk. It is riskier than getting returns of 5% by purchasing Capital Gain Bonds from NHAI & REC to save tax.

Why I Did Not Consider Tax on Annual Interest from Capital Gain Bonds?

Considering both scenarios, the tax liability would be approximately equal if you are in the 20% tax bracket category.

1. If you invest in capital gain bonds, the tax liability would be around 2.50 Lakhs.
2. If you invest in equity instruments, the gain amount would be taxable (above 1 Lakh). At the rate of 10% i.e. around 2.34 Lakhs.

It would be slightly higher if the tax bracket is 30%. But it is always better to pay some additional tax instead of putting your entire capital at risk.

Conclusion

Do I still need to tell you whether you should purchase Capital Gain Bonds from NHAI & REC to save tax?

If so, the answer is a simple YES.

Feel free to drop comments if you still have any doubts or queries.