Capital Gain (54EC) Bonds

Capital Gain Bonds are tax-saving bonds under section 54EC. Hence, they are also sometimes called ‘54EC bonds.’ You can invest long-term capital gains from the sale of property or land in these bonds to avoid paying capital gains tax. Only a few issuers like Rural Electrification Corporation (REC), Power Finance Corporation (PFC), and IRFC (Indian Railways Finance Corporation) can issue Capital Gain Bonds. These issuers are highly rated by the rating agencies which makes their bonds to be at low risk.

Capital Gain Bonds in India

Capital Gain Bonds are bonds that help investors save long-term capital gains arising from the sale of a capital asset (like land or property).

What income tax section talks about Capital Gain Bonds?

Income tax section 54EC discusses the benefits of Capital Gain Bonds.

Who should invest in Capital Gain Bonds?

Investors who have realized long-term capital gains due to the sale of land or property should consider investing in Capital Gain Bonds.

Who should not invest in Capital Gain Bonds?

Investors who are looking to reinvest the proceeds or gains realized in buying a new property or land within one year of the sale should not invest in 54EC bonds. These bonds have a lock-in period of 5 years from the date you invest.

Can NRIs invest in Capital Gain Bonds?

Yes, NRIs are eligible to invest in Capital Gain Bonds and claim tax exemption if they have realized long-term capital gains from the sale of land/property.

Capital gains bond interest rates

The interest rate offered by capital gain bonds is 5%. The interest is paid out annually.

What is the limit of investing in Capital Gain Bonds?

Eligible investors can invest only up to Rs. 50 Lakh in Capital Gain Bonds in a given financial year. The minimum investment required at a time is Rs. 10,000. Additionally, to avail of benefits under section 54EC, it is critical that investment is done within 6 months of the sale of the asset.

Capital gains bond lock-in period

Capital Gain Bonds have a lock-in period of 5 years from the investment time. Capital Gain Bonds cannot be sold until the bond's maturity date.

What is the taxation of Capital Gain Bonds?

Capital Gain Bonds are unlisted. Hence the following taxation applies on these bonds.

• Taxation on the interest of Capital Gain Bonds: Interest earned from Capital Gain Bonds is added to your annual income and taxed as per your marginal income tax slab rate.
• Taxation on capital gain from Capital Gain Bonds: Since it is not possible to transfer the bonds before maturity, there are no capital gains that can be realized by selling these bonds. Hence, capital gains taxation is not applicable.

Why are Capital Gain Bonds called 54EC bonds?

Capital Gain Bonds are mentioned under Income Tax section 54EC. Hence, Capital Gain Bonds are also called 54EC bonds.

Who can issue Capital Gain Bonds?

54EC bonds can be issued only by specific government-backed companies. These are REC (Rural Electrification Corporation), PFC (Power Finance Corporation), and IRFC (Indian Railways Finance Corporation.

Risks of Investing in Capital Gain Bonds

The credit default risk of these bonds is extremely low since the issuers are government-owned and controlled by public sector companies. However, the interest rate that these bonds offer is quite low: 5%. There is a high risk of losing money to inflation on a post-tax (or even pre-tax) basis.

Advantages of investing in Capital Gain Bonds

The primary advantage of investing in Capital Gain Bonds is the can avail tax exemption of up to Rs. 50 Lakh in a financial year. Another advantage is the highest safety of the bonds because the issuers are government owned PSUs. Since these bonds cannot be liquidated before maturity, it eliminates the price risk and liquidity risk that are associated with other bonds if they are traded or sold before maturity.

How to identify the best Capital Gain Bonds?

There are very few Capital Gain Bonds options at any given time. And barring the issuer, all the other aspects of Capital Gain Bonds are standard - maturity period, interest rate etc. Hence, there are no best Capital Gain Bonds. Investing in any Capital Gain Bonds will do the job for eligible investors.