The upcoming Union Budget 2024-25 is likely to introduce provisions that will help secure cheaper funds for two key state-owned companies, IREDA and HUDCO, in alignment with the Modi government’s goals of boosting renewable energy production and affordable housing, according to a moneycontrol report citing a government official.
“The government is mulling including the two PSUs – Indian Renewable Energy Development Agency (IREDA) and Housing and Urban Development Corp. Ltd. (HUDCO) – under Section 54EC of the Income Tax Act. Once these PSUs are included under the Section, the investors buying their bonds will be exempted from capital gains tax,” the MC report cited the official as saying. “The interest rates of such bonds are much lower than in the bond market.”
What is Section 54EC?
Section 54EC of the Income Tax Act provides an exemption from long-term capital gains (LTCG) arising from the sale of immovable assets, such as land and houses, if the proceeds are invested in the PSUs notified under this section. Currently, bonds of state-run companies like Rural Electrification Corp. Ltd (REC) and Power Finance Corp. (PFC) qualify for these exemptions.
LTCG on property sales are taxed at 20 per cent, leading to significant tax liabilities. However, the exemption under Section 54EC can offer considerable tax relief. Although the interest on these PSU bonds is lower, it remains a popular method for investors to save on taxes.
Potential Impact on IREDA and HUDCO
“The government is working on getting the same status for IREDA and HUDCO as is currently available to REC and PFC under this Section of the Income Tax Act. 54EC Bonds have an interest rate of 5.25 percent per annum currently while in the bond market, the interest on the PSU bonds is above 8 percent approximately,” the official said.
If IREDA and HUDCO are included under Section 54EC, it would make their bonds more attractive to investors due to the tax exemption on capital gains. This could lower the borrowing costs for these firms, enabling them to fund renewable energy projects and affordable housing initiatives more efficiently.
Benefits for Investors
Investors seeking to reduce their tax liabilities from long-term capital gains can benefit significantly from investing in bonds issued by IREDA and HUDCO if they are included under Section 54EC. The lower interest rates on these bonds, compared to the higher rates in the general bond market, are offset by the tax savings on capital gains, making them an appealing option for tax-savvy investors.
Under Section 54EC, investments in specified bonds must be made within six months of the sale of immovable property, and the invested amount cannot be redeemed before five years.
“The finance ministry has currently sought some additional information from IREDA and HUDCO on their inclusion in the Section. However, no amendment is needed in the Income Tax Act; it can be simply notified,” the official said, according to the MC report.
In April, the government granted IREDA and HUDCO Navratna status, giving the state-run companies operational autonomy.
Finance Minister Nirmala Sitharaman is likely to present Budget 2024-25 on July 23.
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