Section 54EC – Capital Gain Bonds – Save Taxes on your Capital Gains.

Harsh Jain
September 20, 2022
capital gain bonds
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The Income Tax act provides you with various avenues to save taxes on your long-term capital gains (LTCG). Now, what constitutes long-term differs from asset to asset. We have already discussed this in detail for equity/debt instruments in our previous blog here. For this post, we will concentrate on LTCG on the sale of immovable property like land/buildings. The period of holding for such assets is 2 years or more and any tax liability for that period is taxed at 20% with the benefit of indexation.

But, we can save taxes on those gains under section 54EC of the IT Act by investing in capital gain bonds.

What is Section 54EC of the IT Act?

Section 54EC provides tax exemptions for long-term capital gains (holding period of 2 years or more) arising from the sale of immovable property. The exemption is available to a maximum limit of Rs. 50 lakhs.

The assessee must invest the proceeds of the gains within 6 months from the sale of such property in eligible bonds (discussed below) to claim the exemption. Any interest earned in the hands of the investor from these bonds is taxed at their individual tax slab rate. Currently, the bonds issued are paying an interest of 5% p.a.

Eligible bonds under Section 54EC 

The bonds offered under Section 54EC are often referred to as Capital Gain Bonds as they help in saving LTCG on the sale of immovable property. The following bonds issued by PSUs are eligible for tax exemptions:

  • Rural Electrification Corporation Limited (REC) bonds,
  • National Highway Authority of India (NHAI) bonds,
  • Power Finance Corporation Limited (PFC) bonds,
  • Indian Railway Finance Corporation Limited (IRFC) bonds. 

Eligibility criteria for investing under Section 54EC

  • Investment shall be made within 6 months from the date of sale of the investment bringing in the capital gains.
  • The maturity period for these bonds is 5 years and if you withdraw your investments before 5 years, you have to pay the original LTCG on your capital gains.
  • Tax exemption from capital gain bonds is not available for Short Term Capital Gains
  • The maximum exemption that you can get is Rs. 50 Lakhs.

Benefits of investing in Capital Gain Bonds

  • Tax-exemption: the primitive advantage you get from Capital Gain bonds is saving taxes on the LTCG you earned over the years from your investments in property/land/building.
  • Safety: As mentioned above, these bonds are AAA-rated and essentially are risk-free as they are issued by Government-backed institutions with virtually no risk of default on principal or interest repayments.
  • Interest: You are also rewarded with 5% per annum of interest with these bonds although the interest earned here is not tax-free and you need to pay the taxes according to your tax slab.

FAQs on Capital Gain Bonds

On what assets is 54EC applicable?

  • 54EC is applicable only on LTCG arising out of the sale of immovable assets like land or property. It is not applicable for investments in stocks/shares/mutual funds etc.

What is the lock-in period for capital gain bonds?

  • The maturity for securities under section 54EC is 5 years.

Are interest earned on 54EC bonds tax-free?

  • No, the interest earned is taxable as per the income tax slab. You will need to declare capital gain from 54EC bonds under your return filing since no tax is deducted for the interest earned from these bonds.

What is the mode of holding Capital Gain bonds? 

  • The bonds can be held either in physical or Demat form.

Is it possible to invest more than Rs. 50 lakhs in these bonds?

  • No, the maximum permissible limit under Section 54EC is Rs. 50 lakhs. An investor needs to consider other sections such as section 54 or 54F for the balance amount of investment.
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