Selling property and looking to dodge that hefty 12.5% capital gains tax? Many rush to 54EC bonds, thinking it’s a smart, safe move. But what feels like a savvy tax hack could silently cost you lakhs in lost returns over five years.
Thank you for reading this post, don't forget to subscribe!The 54EC Lure: A Closer Look
Under Section 54EC, you can invest up to ₹50 lakh of your long-term capital gains (LTCG) from property sales into bonds issued by NHAI or REC within six months. The big draw? Full exemption from LTCG tax, potentially saving you over ₹6.5 lakh upfront. Sounds good, right?
But dig a little deeper, and the cracks appear:
- Low Returns: These bonds are locked in for five years, can’t be sold or pledged, and offer a taxable interest of just 5.25%. For those in the highest tax bracket, your post-tax return plummets to a mere 3.745%.
- The Cost of “Safety”: While you save on tax today, you’re sacrificing significant growth potential.
The Hidden Cost: Opportunity Lost
Sujit Bangar of TaxBuddy.com highlights the stark contrast when comparing 54EC bonds to equity mutual funds. Historically, equity mutual funds have delivered 12% to 14% CAGR over five years. Even after accounting for the LTCG tax on these gains, you’re still looking at a robust 10.5% to 12.25% return.
This difference isn’t pocket change. It could mean earning ₹9.6 lakh more over five years by choosing smarter investments, even after paying your taxes upfront!
Smarter Choices for Long-Term Growth
Kanan Bahl of FinGrowth reinforces this point: for investors with a longer horizon and comfort with some market volatility, accepting the tax hit and investing in growth assets often makes more sense. For those seeking a balance of risk and liquidity, he suggests exploring arbitrage funds.
The Takeaway
If your only goal is to save every rupee in tax right now, 54EC bonds will do their job. However, if you have time and are willing to ride out some market fluctuations, smarter investing strategies can leave you significantly better off. Don’t let the appeal of immediate tax savings silently erode your potential wealth.
