Everything You Need to Know About 54EC or Capital Gain Bonds

Are you selling your investments or property and worried about paying long-term capital gains? Did you know you can avoid paying long-term capital gains tax by investing in another product? Yes, you read it right. You can avoid paying capital gains tax by investing in 54EC bonds. Curious?

54EC bonds or capital gain bonds help reduce the tax liability of long-term capital gains. Let’s understand what capital gains are, their features, and tax benefits. 

What are 54EC Bonds or Capital Gains Bonds?

Section 54EC bonds or capital gain bonds are financial instruments that are issued by government-backed institutions or public sector companies. The main purpose of these bonds is to help investors save on long-term capital gains that arise from the sale of immovable properties, shares and gold. However, the key is to invest the gains within six months of the sale.

The investment limit is Rs 50 lakhs, and the interest earned from 54EC bonds is subject to income tax. These bonds have the highest AAA rating as PSUs issue them.

Features of 54EC Bonds

The following are the features of 54EC bonds:

• Minimum Investment Amount: You can invest in one bond worth Rs 10,000.
• Maximum Investment Amount: Rs 50,00,000 or 500 bonds per financial year.
• Lock-in Period: 54EC bonds have a five-year lock-in period.
• Interest: 5.25% p.a. The interest from the capital gains bond is paid annually.
• Credit Rating: Capital gain bonds have a AAA credit rating and are considered to be the safest bonds, as the default risk is low.
• Taxation: The interest earned from 54EC bonds is taxable. The interest income is added to your total taxable income and is taxed as per the applicable IT slab rate. No TDS is deducted on the Interest income.
• Holding: You can hold the capital gain bonds in your demat account or in physical form.
• Transferability: 54EC bonds are not transferable from one person to the other.

Types of 54EC Bonds

Following are the types of 54EC bonds available for investment:

Rural Electrification Corporation Limited (REC) Bonds

REC is a ‘Navratna’ public sector company that plays a crucial role in the power sector by extending financial assistance to diverse segments of the power industry. It operates under the Ministry of Power and extends loan support to state electricity boards and state power utilities for investments in rural electrification initiatives.

REC secures funding for its operations through market borrowings by issuing bonds with varying maturities and availing term loans.

National Highway Authority of India (NHAI) Bonds

The NHAI is a governmental body formed by parliamentary legislation. The main function of NHAI is to construct and maintain national highways in India. NHAI issued bonds to finance these development projects. The bonds are called NHAI capital gain bonds.

Power Finance Corporation Limited (PFC) Bonds

PFC is a government-owned financial institution with the primary objective of providing financial assistance to the power sector in India. It provides financial assistance to the entire power sector value chain across India. This includes financing to state and private utilities in generation, transmission, and distribution space, including financing the associated forward and backward linkages. To fund these operations, PFC issues PFC capital gain bonds.

Indian Railway Finance Corporation Limited (IRFC) Bonds

IRFC is a Government of India enterprise that is involved in financing the Indian railways. It mobilises funds from both domestic and international capital markets by issuing IRFC capital gain bonds.

Here’s a table summarising the four 54EC bonds:

Why Should You Invest in Capital Bonds?

Exemption on capital gains: By investing in 54EC bonds, you can avail exemption on long-term capital gains tax, which you would’ve otherwise paid on capital gains of a long-term asset. You can claim a maximum exemption of Rs 50 lakhs in a financial year by investing in these bonds.

Safety: 54EC bonds are backed by the government and hence have a sovereign rating. This implies that the risk associated with these bonds is close to zero. Moreover, all the 54EC bonds are rated AAA by credit rating agencies and hence have low default risk.

Fixed return: Like any other bonds, these bonds pay a fixed return to the investors. At present, these bonds are offering approximately 5.25% interest for a tenure of 5 years.

No TDS: The interest earned on these bonds is not subject to any Tax Deducted at Source (TDS). Therefore, you will receive the full interest in your bank account. 

Ease of access: The government gave investors the preference to choose the mode of holding the bonds. Hence, you can hold 54EC bonds either in demat or physical form, whichever is convenient to you.

How to Invest in Capital Gains Bonds?

The 54EC bonds are not listed on the stock exchange, and hence, you need to purchase these bonds directly from the issuer or any authorised intermediary. Once you meet the eligibility criteria and have selected the bond you want to invest in, follow the steps below to invest in capital gains bonds.

• First, check if the bond is accepting any investments. You can directly check on the issuer’s website or any authorised intermediary’s website. The current 54 EC bonds in the market are REC 54 EC Bond, PFC 54 EC Bond, IRFC 54 EC Bond.
• Next, download the application form and fill it in with all the necessary details, such as PAN number, Aadhar number, bank details, and the amount you want to invest. You will also have to submit a photocopy of all these documents along with the application.
• Then, make the payment either electronically through NEFT or RTGS or through a demand draft. Include the details of the payment, such as the URN number in the application form.
• After making the payment, you will receive a confirmation from the issuer with details about the investment, such as the investment amount and date of investment.
• You will receive the bond certificate if you are investing in physical form or in your demat if you are investing online.

Who is Eligible to Invest in 54EC Bonds?

Any taxpayer who is liable to pay long-term capital gains tax can invest in 54EC Capital Gains Bonds:

• Resident and Non-Resident Individuals
• Hindu Undivided Family (HUF)
• Other entities, such as corporations, partnership firms, and trusts, are not eligible.

Calculation of Tax Exemption in Capital Gain Bonds

If you invest your capital gains in 54EC or capital gains bonds, you can save on taxes and ultimately accumulate higher wealth. Let’s understand this with an example.

Suppose you invested Rs 30 lakhs in a property in FY17 and sold it for Rs 60 lakhs after three years (in FY20). Then, the indexed cost of acquisition is Rs 32,84,090, and the capital gains are Rs 27,15,910. Suppose you invest the capital gains in 54EC bonds (return 5.25%) or in any other fixed-return investment (return 8.5%) for a tenure of 5 years. Let’s see what the maturity corpus is in both cases.

Despite investing in low-return 54EC bonds, the maturity corpus is higher due to the higher investment amount. In the case of other investments, the investment amount is lower due to capital gains tax. However, if you redeem your investment in 54EC bonds before maturity, then the long-term capital gains on which you claimed a tax exemption will be taxable. Moreover, the interest from the 54EC bonds is also taxable.

Frequently Asked Questions (FAQs)

What is the lock-in period for 54 EC capital gains bonds?

Capital gains bonds have a 5-year lock-in period. You cannot redeem or transfer the bonds during the lock-in period.

Is the interest from 54 EC capital gains bonds taxable?

Yes, the interest earned from capital gains bonds is taxable as per your applicable income tax slab rate.

Can I claim an exemption under section 54EC with respect to short-term capital gain?

No, 54EC bonds are only for long-term capital gains.

When should I purchase capital gains bonds to claim an exemption under section 54EC?

You must purchase a 54EC Bond within six months from the date of sale of the capital asset.

Are capital gains bonds taxable on maturity?

On maturity, the principal amount is not taxed. However, the interest earned during the bond tenure is taxable.

Can NRIs invest in 54EC bonds?

Yes, NRIs can invest in 54EC bonds.

Can I buy capital gains bonds after six months?

Yes, but to get the tax exemption, you need to invest within six months of the date of the sale of the property.

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

As per the Finance Act 2014 amendment, you cannot invest more than Rs 50 lakh in a financial year in the 54EC bonds to claim tax benefit. Any additional investment in 54EC bonds will not be eligible for tax deductions. However, you can invest an additional amount under section 54F or 54.

How to invest in 54EC bonds?

You can invest via online (demat) or offline route. You can transfer money through cheque, DD and RTGS.