Capital Gain Bonds

54EC bonds, also known as capital gains bonds, are one of the most effective ways to save on long-term capital gains tax arising from the sale of a capital asset.
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Capital Gain Bonds
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3 mins
13-June-2025

Capital Gains Bonds, commonly referred to as Section 54EC Bonds, provide a way to reduce long-term capital gains tax on property or assets held for more than two years. Under the Income Tax Act, 1961, you can invest the gains in these bonds within six months of the sale to avail of tax exemption. The maximum permissible investment is Rs.50 lakh, with eligible options including REC, PFC, and IRFC bonds. These bonds serve as a secure investment avenue while deferring capital gains tax.

Provisions of Section 54EC

Under Section 54EC of the Income Tax Act, 1961, long-term capital gains from the transfer of a capital asset can be exempted from tax if the following conditions are met:

The asset sold must be a Long-Term Capital Asset, such as land, a building, or both, held for at least 24 months before the sale.

  • The entire capital gain must be invested in eligible Section 54EC Bonds within six months of the transfer.
  • The investment must be held for a minimum of five years, during which the bonds cannot be transferred, converted into cash, or used as security for a loan; otherwise, the exemption benefit will be revoked.
  • If the invested amount is lower than the capital gains realised, the tax exemption applies only to a proportionate amount.
  • The maximum permissible investment is ₹50 lakh across the current and subsequent financial years.

Features of 54EC Bonds

54EC bonds are widely preferred investment instruments as they provide tax exemption on long-term capital gains. Additionally, they offer the following features:

  • Safe and Secure: These bonds carry an AAA rating, ensuring high creditworthiness.
  • Interest: The interest earned is taxable; however, no TDS is deducted, and wealth tax is exempt.
  • Tenure: 54EC bonds have a mandatory lock-in period of five years (effective from April 2018) and cannot be transferred.
  • Investment Amount: The minimum investment is one bond worth ₹10,000, while the maximum investment is 500 bonds, amounting to ₹50 lakh in a financial year.
  • Interest Rate: These bonds offer an annual interest rate of 5.25%.

Who is eligible to invest in 54EC bonds?

The eligibility to invest in 54EC Capital Gain Bonds is quite broad

Here's a breakdown of who is eligible to invest in these bonds:

  1. Resident individuals
  2. Non-resident individuals
  3. Hindu Undivided Families (HUF)

It's worth noting that while these are the primary eligible entities, other entities such as trusts may also be eligible depending on the specific circumstances and provisions of the Income Tax Act at the time of investment. It's always advisable to consult with a tax advisor or financial expert for personalised advice regarding investments and tax planning.

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Features of Capital Gains Bonds

Details

RECL

IRFC

Issue Opening Date

April 1, 2023

April 1, 2023

Issue Closing Date

March 31, 2024

March 31, 2024

Coupon/Interest Rate/Yield

5.25% annually (No TDS)

5.25% annually (No TDS)

Rating

AAA / Stable (CRISIL/ICRA/CARE)

AAA / Stable (CRISIL/ICRA/CARE)

Tax Status

Taxable

Taxable

Tax Benefit

Section 54EC

Section 54EC

Face Value / Issue Price (Rs.)

₹10,000

₹10,000

Minimum Investment (Rs.)

₹20,000

₹20,000

Maximum Investment (Rs.)

₹50 Lakhs in a Financial Year across RECL

₹50 Lakhs in a Financial Year across IRFC

Tenor

5 Years (automatic redemption at maturity)

5 Years (automatic redemption at maturity)

Interest Payment Date

30th June

15th October

Mode of Interest Payment

Annual

Annual

Transferability

Non-transferable, non-negotiable, non-marketable, not eligible as security for any loan/advance

Non-transferable, non-negotiable, non-marketable, not eligible as security for any loan/advance

 

Why should you invest in capital gains bond? 

Here are some compelling reasons to consider investing in these financial instruments:

  1. Capital gains tax deferral
    One of the primary benefits of investing in Capital Gains Bonds is the ability to defer the payment of capital gains tax. If you have recently sold an asset, such as property or stocks, and incurred capital gains, investing the proceeds into these bonds allows you to defer the tax payment. This can be particularly advantageous for managing your cash flow more effectively, as it delays your tax liability to a later date.
  2. Stable returns
    These bonds typically offer a fixed interest rate, which ensures a predictable and steady income stream during the tenure of the bond. The interest rates, while not necessarily high, are stable and when combined with the savings from deferred capital gains tax, the overall returns can be competitive with other market investments. This predictability makes them a suitable option for conservative investors or those seeking to balance their investment portfolios.
  3. Low risk
    Capital Gains Bonds are considered a low-risk investment option. They are often issued by government entities and are rated 'AAA' by credit rating agencies, which indicates the highest level of creditworthiness. This high rating is reassuring for investors who are risk-averse and seek security for their capital.
  4. Long-term investment option
    These bonds are designed for long-term investment. If you are an investor with a long-term horizon and are aiming to reduce your taxable income, Capital Gains Bonds can serve as an excellent choice. The tax benefits, combined with the security and stability of the investment, make them an appealing option for those planning their financial future over an extended period.

Investing in 54EC bonds can thus be a strategic decision, especially for those who have recently realised capital gains and are looking for ways to efficiently reinvest these gains while enjoying tax relief. This type of investment is particularly suitable for individuals seeking to balance the security of their investments with reasonable returns and tax efficiency.

Additional read: What are Government Bonds

Bonds eligible under section 54EC

The government of India has specified a list of eligible bonds under Section 54EC, which includes bonds issued by Indian Railways Finance Corporation Limited (IRFC), Power Finance Corporation limited (PFC), National Highways Authority of India (NHAI), and Rural Electrification Corporation (REC). These bonds have a fixed maturity period of 5 years and are redeemable after lock-in period is completed. The proceeds received by the investors on maturity or after selling under exceptional circumstances (nailed down) are exempt from being taxed under Section 54EC up to Rs. 50 Lakh. However, if capital gain bonds are sold or converted into cash before reaching maturity, the invested amount that was eligible for tax exemption will be considered as long-term capital gain and taxed accordingly in the year of conversion.

How to invest in 54EC bonds?

Here is all the information you need to know about investing in 54EC Capital Gain Bonds:

1. Investing SEC 54EC

Also known as Sec 54EC Bonds, capital gains bonds are a form of investment instrument approved by the Income Tax Act of 1961. These bonds are used by investors to save on long-term capital gains taxes derived from the sale of assets or properties. When you invest in Sec 54EC Bonds, you essentially defer the capital gains tax payments while accessing the potential benefits of a solid investment alternative.

2. Section 54EC - Provisions

Based on provisions listed under section 54EC of the Income Tax Act of 1961, all long-term capital gains resulting from capital asset transfers would be excused from taxes if:

  1. The property is a long-term capital asset, such as a building, land, or both. For the asset to be considered long-term, the taxpayer must possess it for a minimum of 2 years before the sale takes place.
  2. The full capital gains realised are invested within 6 months of the transfer date in the qualifying Sec 54EC Bonds.
  3. This investment is possessed for 5 years, and the bonds obtained cannot be transferred or converted into cash. No loan/advance can be taken against the asset of such a bond under 5 years from the acquisition date. If these conditions are not met, the capital gain exemption will no longer be eligible.
  4. If the funds invested in bonds are less than the realised capital gain, only a part of the capital gains will be tax-free.
  5. The total investment amount cannot surpass Rs. 50,00,000 during the prevailing fiscal year and the following fiscal year.

Advantages of capital gain bonds

One of the key advantages of capital gain bonds is their ability to provide tax exemption under Section 54EC of the Income Tax Act in India. Investors can claim this exemption by investing up to a specified limit in these bonds within the prescribed time frame. By doing so, they can defer paying the capital gains tax and potentially even avoid it altogether, thereby increasing the overall returns on their investments.

Another attractive feature of capital gain bonds is the security they offer. Being issued by government-backed entities or public sector companies, these bonds are considered relatively safe compared to other investment avenues with market-linked risks. The assurance of a fixed interest rate or coupon rate further adds to the appeal for risk-averse investors seeking stable returns.

Additional read: Different Types of Bonds

Disadvantages of capital gain bonds

However, like any investment option, capital gain bonds have their limitations too. The most notable limitation is the relatively lower interest rates compared to other investment options available in the market. As these bonds are designed to offer tax benefits, the interest rates are usually set at levels that may not match the potential returns of riskier investments like equities. Moreover, the lock-in period restricts liquidity, making it unsuitable for investors who might need access to their funds in the short term.

Example of capital gain bonds

Let's consider an investor named Mr. Patel who sells a residential property and earns a long-term capital gain of Rs. 60 lakh. To save on capital gains tax, he decides to re-invest Rs. 50 lakh (the maximum permissible limit) in capital gain bonds within the prescribed time frame of six months after selling the property. Assuming the bonds offer an interest rate of 5.75% per annum, Mr. Patel's investment would yield an annual interest income of Rs. 2,87,500 (Rs. 50,00,000 * 5.75%).

As the interest income is taxable as per Mr. Patel's income tax slab, let's assume he falls in the 30% tax bracket. Therefore, he would have to pay Rs. 86,250 (Rs. 2,87,500 *30%) as income tax on the interest earned. However, Mr. Patel can still enjoy the capital gains tax exemption on the original Rs. 50 lakh earned from the property sale.

Conclusion

In conclusion, capital gain bonds present an attractive proposition for investors looking to save on long-term capital gains tax while supporting the nation's development. They offer a secure investment option with tax benefits, but it's essential for investors to carefully consider their financial goals, risk appetite, and liquidity requirements before committing to these bonds. Consulting with a financial advisor is recommended to make an informed decision and create a well-rounded investment portfolio.

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Frequently asked questions

What are capital gain bonds?

Capital gain bonds, also known as Section 54EC bonds, are investment instruments that help individuals save tax on long-term capital gains from property sales. By investing in these bonds within six months of the sale, investors can claim tax exemption. These bonds have a five-year lock-in period and are issued by institutions like REC, PFC, and IRFC.

What happens to capital gain bonds after 5 years?

After completing the mandatory five-year lock-in period, capital gain bonds mature, and investors receive their principal amount. Since these bonds are non-transferable and cannot be pledged during the tenure, they become fully liquid after maturity, allowing investors to reinvest or utilise the funds without any restrictions on their use.

What is the current interest rate on capital gain bonds?

The current interest rate on capital gain bonds is 5.25% per annum. This interest is taxable under the investor’s income, but no TDS is deducted at the source. The interest is paid annually, making these bonds a fixed-income investment option while providing tax exemption on long-term capital gains.

What is the time limit for capital gain bonds?

To avail of tax exemption under Section 54EC, the capital gains must be invested in eligible bonds within six months from the date of the asset sale. Additionally, these bonds have a mandatory five-year lock-in period, during which they cannot be transferred, redeemed, or used as collateral for loans.

What are the disadvantages of capital gain bonds?

Disadvantages of capital gain bonds

  • Lock-in period: Five-year lock-in restricts liquidity.
  • Taxable interest: Interest earned is subject to tax.
  • Lower returns: Interest rate is lower than other fixed-income options.
Which bank issues 54EC bonds?

54EC bonds are not issued by banks. They are offered by government-backed entities like the Rural Electrification Corporation Limited (RECL), Indian Railway Finance Corporation (IRFC), Power Finance Corporation (PFC), and National Highways Authority of India (NHAI), specifically to provide capital gains tax exemption under Section 54EC.

What is the current interest rate on capital gain bonds?

As of the latest issue period (April 2023–March 2024), the interest rate on 54EC capital gain bonds issued by RECL and IRFC stands at 5.25% per annum. The interest is taxable but not subject to TDS and is paid annually throughout the five-year lock-in tenure.

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