Capital Gain Bonds 

Capital Gain Bonds 

Capital gain bonds are financial instruments that governments use to raise funds to develop their infrastructure. Individuals investing in bonds sell property and get capital gains, which are used to buy capital gain bonds. However, investors should buy bonds from the government or its agencies within six months after selling their properties and acquiring capital gains.

When a person fails to invest the capital gains within the prescribed time frame, they can deposit that money into a public sector undertaking bank (PSUB). The money deposited is treated as capital gain bond investment in India, and the depositors benefit from tax exemptions.

Capital gain bonds have limited investments. An investor is allowed to buy bonds worth Rs.50 lakh and below. When the capital gains from real estate investment are shared, each individual is entitled to purchase capital gain bonds of up to Rs.50 lakh.

How Do Capital Gain Bonds Work?

Investment in capital gain bonds begins with selling a property or properties. Individuals who sell their properties get capital gains, which go to purchase bonds from the government. After buying the capital gain bonds, the investors receive fixed income from the bonds. Apart from fixed income, bond investors are exempted from capital gains taxes, increasing their income.

Bond investments come with a lock-in period. However, the lock-in period and capital gain bonds' interest rate are agreed upon ahead of time. Investors who purchase the bonds redeem their investments after five years. At the bond's maturity, investors get the principal amount and the payable interests on their capital gain bonds.

Benefits of Investing in Capital Gain Bonds

Low-Risk Investment Investors should consider the safety of their funds before investing. Capital gain bonds are among the safest investments one can consider. With a rating of AAA, capital gain bonds guarantee the investors that their money is secure. In addition, the bonds are backed by public sector enterprises, which means that the default rate is too low.

The government is reliable and has the power to collect taxes and repay the money acquired through issuing bonds. Therefore, investors will get the full principal amount and interest when the bonds mature.

1.  Assured Income

An income guarantee is another benefit of investing in capital gain bonds. The bond buyers are creditors and receive fixed income regularly. After buying bonds, the investors get returns from payable interest. The government of India guarantees annual income from interest earned on capital gain bonds. However, the bond issuer pays back the principal amount after maturity, which is five years. Therefore, investors can buy bonds without worrying about losing income from their investments.

2.  Tax Exemption Benefits on Capital Gain Bonds 

Tax-free returns on investment are the primary benefit of investing in capital gain bonds. After selling properties, individuals are supposed to pay capital gain tax. However, when investors buy government bonds using capital gains, they don't pay tax on income earned from bonds. Therefore, capital gains bonds offer a steady income stream while allowing investors to defer paying taxes on their capital gains. Investment in capital bond gains appeals more to investors seeking ways to reduce taxable income.

3.  Investment Accessibility

Easy access to investment opportunities is an essential factor for investors. Investors only have to check the companies floating bonds. Once an investor identifies institutions offering bonds, they can buy the bonds online. Below is a guide on how to buy capital gain bonds online in India

  • Visit the official websites of institutions offering capital gain bonds in India.
  • Fill out the application form online after reading capital gain bond instructions.
  • Agree to terms and conditions of bonds
  • Choose whether to hold bonds on physical or Demat mode and fill in relevant details before clicking the 'submit' button.
  • Investors who hold bonds in the Demat form should select depository NSDL/CDLSL and fill in the required Demat account details.
  • After applying, the system generates a unique for an investor to download, print and sign.
  • The next step is uploading the form by clicking the 'Upload Application' option.
  • OPT verification is also required after providing email and mobile phone details.
  • The last step is online payment for the capital gain bonds through debit cards or net banking.

What Risks are involved in Capital Gain Bonds?

While investing in capital gain bonds has advantages, there are potential drawbacks. Therefore, investors should consider the risks before committing their funds to bonds. The risks from bond investment include

Liquidity risk

Bonds have low liquidity compared to other fixed deposit schemes. Once investors purchase the capital gain bonds, they can access the money before maturity. Life is full of uncertainties. Emergencies happen when they are expected. Therefore, investors should plan better before committing their funds to long-term bonds since the money won't be accessible when needed.

Interest rate Fluctuation Risk

The market interest rates change depending on the economy and inflation. For example, investors can buy capital gain bonds at the interest of 5%, but the market rate can go up to 6%. Since the money is locked for five years, such investors lose the opportunity to invest their money in new bonds with a 6% interest rate.

In summary, Capital gain bonds are a great way to save on taxes while earning a steady income over an extended period. However, bonds come with risks and require careful consideration before investing in them. Capital gain bonds are worth exploring when looking for ways to save on taxes while enjoying future financial security. But investors should consult with experienced financial advisors or accountants before committing their funds.


What are capital gain bonds?

Capital Gain Bonds are financial instruments issued by governments to finance specific capital projects. CG bonds are in various denominations and range from small retail amounts to large institutional investments. The government pays interest on issued bonds throughout the term until they mature. The maturity of capital gains bonds is five years, upon which the investor receives both their original principal plus any accrued interest payments.

Is it worth investing in capital gain bonds?

Yes, investment in capital gain bonds is worthy due to the following reasons:

  • Guaranteed income in the form of payable interest
  • Investment in bonds is more secure since the government is responsible and guarantees repayment.
  • Capital gain bonds are an easy-to-access investment opportunity.

How can an investor buy capital gain bonds in India?

Investors seeking to invest in capital gain bonds can purchase the bonds through brokers or visit the official websites of institutions issuing bonds and purchase online.

How long should investors lock their money when they purchase capital gain bonds?

Individuals who buy capital gain bonds lock the money for five years. For an investor to gain maximum benefits from bonds, they have to wait for the money to mature, where maturity takes five years.