Capital Gains Bonds for Tax Exemption under Section 54EC

Capital gain bonds, also known as 54EC bonds, are tax exempt bonds that allow investors to enjoy tax exemptions, under section 54EC, on capital gains made from property sale. Moreover, no tax is deducted at the source. Investors can purchase 54EC bonds to reduce the long-term capital gains tax on income from sale of immovable property. For example, NRIs selling property in India.

Capital Gains Bonds for Tax Exemption under Section 54EC

How investment in Capital Gain Bonds Works?

54EC bonds are specifically meant for investors earning long-term capital gains and would like to get exemption on these gains. Investors who purchase capital gains bonds are known as debt holders. 54EC bonds are issued by government backed infrastructure companies, which reduces the risk involved in purchasing such bonds. 

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Key Features of 54EC Bonds

  • These bonds are issued for a lock-in period of 5 years and are non-transferable.
  • Investors can avail of tax deduction under section 54EC of the Income Tax Act. However, tax exemptions are not available on short-term capital gains tax. 
  • The minimum investment allowed in 54EC bonds is Rs. 10,000 per bond and the maximum investment allowed is Rs 50 lakhs in a financial year.
  • These bonds offer 5.25% interest per annum. 
  • Since they are not listed in the stock exchange, you can’t sell 54EC bonds.
  • Interest earned is taxable. However, no TDS is deducted on the interest earned from 54EC bonds.
Tenure5 years
Interest Rate*5.25% p.a.
TaxationInterest earned is taxable; no TDS is deducted 
Minimum Investment1 Bonds (Rs. 10,000)
Maximum investment500 Bonds (Rs. 50,00,000 Lacs)
Mode of holdingDemat or physical 

Note: Interest rate is subject to periodic changes and depends on the internal policy of the respective company/ government.

Benefits of Capital Gains Bonds

Individuals and members of HUF can invest in capital gains bonds for wealth creation and tax exemption. To avail tax benefits, you should invest in these bonds within 6 months of the date of sale of immovable property. Here are key benefits of 54 EC bonds:

  • Tax saving: Long-term capital gains from sale of 54EC bonds can be reinvested to save tax. 
  • Security: 54EC bonds are backed by the government of India. Hence, there is no or minimal market risk.   
  • Dual benefit: By investing in 54EC bonds, not only you save tax but also earn interest income over time. 
  • Flexibility: Investors can hold 54EC bonds in either a demat account or physical form. 

Can NRI buy Capital Gains Bonds in India?

Yes. NRIs can buy capital gains bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC), etc. to save tax on their long-term capital gains from the sale of their property in India.  

How to get LTCG Exemption through Investment in Capital Gains Bonds

Individuals need to meet the following requirements to qualify for tax exemptions under Section 54EC:

  • The investment amount should come from capital gains made out of the sale of assets like residential or commercial properties.
  • Investment in 54EC funds should not be more than Rs. 50 lakh. However, if the capital gains is shared by partners in a real estate business, each partner can invest up to Rs. 50 lakh. 
  • The investment should be made within 6 months from the date of sale of the property or before filing your income tax returns.

Companies that Issue Capital Gains Bonds

Capital gains bonds are issued by the following corporations:

CorporationsIssue DetailsRattingTenure
Rural Electrification Corporation (REC)On-GoingAAA 5 Years
National Highway Authority of IndiaOn-GoingAAA 5 Years
Power Finance CorporationOn-GoingAAA 5 Years
Indian Railways Finance CorporationOn-GoingAAA 5 Years

NRI Investment in Bonds is a very popular and rewarding opportunity. In addition, capital bonds offer dual benefit of wealth creation and tax saving. If you have any doubts or queries and want specialized advice from experts at SBNRI, contact us using the button below. Also visit our blog and YouTube Channel for more details.

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What is the lock in period for capital gains bonds?

54EC bonds are issued for a lock-in period of 5 years and are non-transferable at any point of time. 

What is the interest rate on 54EC bonds?

These bonds are offered at 5.25% interest per annum. However, interest rates are subject to revision by the respective Companies/Government from time to time.

How 54EC bonds help in tax exemptions?

You can invest capital gains arising from sale of assets such as land or building up to Rs. 50 lakh in capital gains bonds to avail tax exemptions under Section 54EC.  

Which bonds are eligible under the Section 54EC?

These bonds are issued by the following corporations:

– REC (Rural Electrification Corporation)
– IRFC (Indian Railway Finance Corporation) 
– PFC (Power Finance Corporation Ltd)

How to invest in 54EC bonds?

You can apply for the 54 EC bonds offline (Physical) and online.

How can I invest in capital gains bonds?

You can invest in these bonds through cheque, DD and RTGS.

Can I buy capital gains bonds after 6 months?

To avail the tax exemption, you need to invest in these bonds within 6 months of the date of the sale of the property.

Can I redeem capital gains tax savings bonds before the lock-in period?

No, you can’t redeem the investment before the maturity of bonds i.e. before 5 years from the date of investment.

If you redeem bonds before their maturity, the exemption granted under Section 54EC will not be granted and you will have to pay LTCG tax on the original capital gains amount.

Is it possible to invest more than Rs. 50 lakh in any 54EC bonds?

As per the Finance Act (no.2) 2014 amendment, you can’t invest more than Rs. 50 lakh in the capital bonds under Section 54EC. You can consider investing under section 54F or 54 to invest more than Rs. 50,00,000.  

Can I borrow loan against capital gain bonds?

Yes. You can apply for a loan depending on the asset security. However, you will not be able to get the tax exemption benefits under section 54EC. The income earned from the long-term capital gains will be taxable from the year you obtained the loan. 

Are 54EC bonds tax-free?

Investors can enjoy tax exemptions under section 54EC of the Income Tax by purchasing these bonds. However, interest earned through investment in these bonds is taxable as per your income tax slab. But no TDS is deducted. 

When should I invest in capital gains bonds?

Since these bonds are used to receive exemption on capital gains from sale of an asset held for a long period, you can invest in 54EC bonds if you have received capital gain from selling a property. 

Who can buy capital gains bonds?

Any individuals, including Non-Resident Indians, and HUFs can apply for these bonds to get capital gains tax exemption. However, you need to buy these bonds within six months of selling property.

How can I buy bonds under section 54EC?

You can buy these bonds online through the respective company’s website or contact a broker. Irrespective of how you buy them, you must invest within 6 months of transferring the asset. The minimum investment allowed is Rs. 10,000 and maximum is Rs. 50 lakh. 

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