After NABARD/REC/NHAI Bonds, SIDBI (Small Industries Development Bank of India) Bonds, are another ‘parking’ opportunity for the investor with long-term capital gains.

Any gain made out of a sale of a capital asset is termed as a capital gain. A capital gain can be differentiated into long-term gain and short-term gain. If a capital asset is sold within 12 months of its purchase it is termed as short-term capital gain and if it is sold after 12 months it is termed as a long-term capital gain. Short-term capital gains are taxed depending on the investor’s tax bracket (10%, 20%, 30%). However, long-term capital gains are taxed at a flat rate of 10% on the capital gain.

Tax on long-term capital gains can be avoided by investing in 54EC Bonds, which give tax benefits u/s. 54`EC of the Income Tax Act. These bonds include NABARD (National Bank of Agriculture and Rural Development), REC (Rural Electrification Corporation) and NHAI (National Highways Authority of India Ltd. In the Budget 2003, the finance minister had announced two new entrants in the 54EC Bond fold. i.e. SIDBI (Small Industries Development Bank of India) and NHB (National Housing Bank). Recently SIDBI entered the capital gains bond market with its issue for investors who want to park their capital gains.

Particulars	Option I	Option II
Rate of Interest	7.25%	7.25%
Tenure	3 years	5 years
Interest payment	Annual/Cumulative	Annual/Cumulative
Minimum Invt. (Rs)	10,000	10,000
Put/Call option	-	After 3 years
Rating	AAA (CARE)	-

There are two options available under the SIDBI Capital Gains Bond. The current rate of interest is same in both the options i.e. 7.25% p.a. This rate is not fixed and shall be made known to the investors before the acceptance of the application. The only difference under the options is the tenure, which is 3 years under Option I and 5 years under Option II. However, there is a put/call option available under option II at the end of 3 years. The interest payment frequency under both the options is annual or cumulative.

The interest rate offered by SIDBI Bonds unattractive and is unlikely to appeal to a large section of the investment community as there are higher yielding instruments available. However, this must be considered as an opportunity to park capital gains and not to earn a high interest yield. To that extent the bond presents a reasonably good opportunity to investors especially of the high networth variety. So if your long-term capital gains is on the higher side, say in the region of Rs 5,000,000 (Rs 50 lakhs), investment is recommended or you will end up paying Rs 500,000 as capital gains tax.

If you are in Mumbai and would like to invest your capital gains in SIDBI Bond, please register here

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