Fixed income products are seeing sharp cuts in interest rates. The latest to join the bandwagon are REC 54 EC capital gains tax exemption bonds. The company has on July 23 announced a modification to information memorandum, whereby it has revised the interest rate to 5% per annum from August 1. The existing rate of 5.75% will be applicable till July 31.

“Where application money is credited in REC’s collection accounts on or after 1 August, 2020 – 5.00% PA and where application money is credited in REC’s collection accounts on or before 31 July, 2020 – 5.75% PA…,” the REC notice said. The interest rate change is for Series XIV.

The previous series XIII was open till 31st March, 2020

The 75 basis point reduction in interest rate means that post-tax interest return from EC 54 bonds, backed by the government, will fall further. Interest payment happens annually on June 30.

54EC bonds are specifically meant for investors earning long-term capital gains (from real estate alone since Budget 2018) and who would like tax exemption on these gains. The tax deduction benefit is available under section 54EC of the Income Tax Act.

At this moment, other 54EC bond issuers like NHAI, PFC, and IRFC also offer 5.75% per annum interest rate. With REC having cut rates, it’s a matter of time that other issuers will align the rates given that varying interest rates of essentially the same product will lead to unhealthy advantage in favour of one issuer, said a banking source.

Prior to Budget 2018, section 54 EC bonds benefits were applicable to long capital gains from the sale of any long-term capital asset. Now it is restricted to only long term capital gains from real estate. Also, the lock in on these bonds was extended from three years to five years from the date of purchase.

The minimum investment for REC 54EC bonds is Rs 20,000 (one bond costs Rs 10,000). The maximum limit for investing in 54EC bonds is Rs 50,00,000 per financial year. The eligible bonds under Section 54EC are issued by REC (formerly Rural Electrification Corporation Ltd), PFC (Power Finance Corporation Ltd), and NHAI (National Highways Authority of India) and IRFC (Indian Railways Finance Corporation Limited).

54EC bonds are popular investment instruments as investing in 54EC bonds allows investors to claim tax deductions on long-term capital gains. 54EC bonds also offer other features.

The interest paid to holders in 54EC bonds is taxable. 54EC bonds come with a lock-in period of 5 years and are non-transferable.

In April, REC had informed that due to the restricted physical movement of applications and bond certificates, etc, caused by lockdown due to COVID-19 throughout the country, there may be a delay in allotment of 54EC Capital Gain Tax Exemption (CGTE) Bonds.

You can read the latest interest rate change notification by REC by clicking here.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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