The National Bank for Agriculture and Rural Development, the apex financial institution for rural finance, will raise Rs 5,000 crore (Rs 50 billion) through capital gains bonds in financial year 2007-08.
"The rural bonds, to be issued by Nabard, will get tax incentives under Section 54EC of the Income-Tax Act, 1961," a finance ministry official said.
Finance Minister P Chidambaram, in his Budget speech, had announced that Nabard would be allowed to issue rural bonds worth up to Rs 5,000 crore.
The bonds will have government backing to enable Nabard to raise funds at a lower cost and to provide refinance to cooperative institutions for stepping up farm and rural credit.
Capital gains arising from transfer of long-term capital assets like a house can be invested in these bonds within a period of six months from the date of transfer of the asset for getting exemption from the capital gains tax.
This is very popular instrument to save 20 per cent tax on capital gains arising from sale of a property. The interest earned from such bonds are taxable at 30 per cent, but the principal amount is protected. Further, the investment has a lock-in period of three years.
Rural Electrification Corporation Ltd and National Highway Authority Ltd have earlier issued such bonds. The interest paid on such bonds is generally low and varies from 5 per cent to 7 per cent per annum.