Capital Gains Bonds

Capital gain bonds or 54EC bonds are the fixed income instruments that provide capital gains tax exemption under section 54EC to the investors. The tax liability on long-term capital gains from sale of immovable property can be reduced by purchasing 54EC bonds.

The owner of the bonds are the debtholders or creditors of the issuer. These bonds are issued by infrastructure companies that are backed by the government. Hence, the risk factor gets mitigated by buying such bonds. The capital gain bonds are redeemable before maturity. One cannot sell these bonds as they are not listed in the stock exchange. The interest is reduced to 5% p.a. from 6% p.a. and are fully taxable in your hands.

Bonds eligible for exemption under section 54EC of the Income Tax Act

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

Key facts to avail the LTCG exemption by investment in capital gain bonds

• To avail the tax-exemption the investment must be made within 6 months of the date of sale of immovable property.
• Such investment can be redeemed only after 5 years. Before april 2018 the bonds could be redeemed within 3 years.
• The exemption on investment is allowed only against long term capital gains on sale of immovable property (i.e. sale of land or building).
• The exemption is available up to a maximum amount of Rs 50 lakh