Capital Gain Bonds allow individuals to claim tax exemption on the Long Term Capital Gains (LTCG) arising from the sale of immovable property or land. Taxpayers can invest the entire LTCG component or a part of it (capped at Rs 50 lakh per financial year) in these bonds to claim the tax exemption.
The profit from the sale of land or property after two years of its acquisition is considered as long-term capital gains. For properties acquired before July 23, 2024, LTCG on property sale is taxed @ 12.5% without indexation or 20% with indexation. For properties acquired on or after July 23, 2024, LTCG arising from the property transfer would be uniformly taxed @12.5% without any indexation benefits. As the exemption on LTCG tax on investing in Capital Gain Bonds has been specified in Section 54EC of the Income Tax Act, these bonds are also popularly known as Section 54EC Bonds
Features of Capital Gain Bonds
Investment Deadline To Qualify for Tax Exemption
Taxpayers would have to invest their LTCG component in the capital gain bonds within 6 months of the date of property transfer.
Capital Gains Bonds Coupon (Interest) Rate:
Capital Gains Bonds issued during the current financial year are offering coupon (interest) rates of 5.25% p.a.
Minimum Investment Amount
At least 2 bonds of Rs 10,000 each have to be invested to claim tax exemption under Section 54EC.
Maximum Investment Amount:
Taxpayers can invest up to a maximum Rs 50 lakh, i.e., 500 bonds, in each financial year.
Tenure
Capital Gain Bonds have a tenure of 5 years. However, the investment in the bonds would be locked in throughout its tenure, i.e., 54EC bonds can neither be transferred nor redeemed nor pledged for availing any loan/advance during their tenure. 54EC Bonds are automatically redeemed after the completion of 5 years.
Interest (coupon) Payment Frequency
Capital Gain Bonds provide annual interest pay-outs to their investors. The date of interest payment varies from issuer to issuer. For instance, the interest pay-out for REC Capital Gains Tax Exemption Bonds would be made on June 30th every year and for PFC Capital Gain Tax Exemption Bonds the date of coupon payment is 31st July of each year.
Taxation of interest income from Sec 54EC Bonds
The interest income earned from capital gain bonds is taxable as per the taxpayer’s income tax slab. However, no Tax Deduction at Source (TDS) is deducted from the interest payments.
Mode of Holding: Section 54EC Bonds can be purchased and held in the demat form or the physical certificate form.
Eligibility
Resident and Non-Resident Individuals and Hindu Undivided Family (HUF) are eligible to invest in Capital Gains Bonds to claim tax exemption under Section 54EC of the Income Tax Act.
Taxability of Maturity Proceeds
The maturity proceeds of Section 54EC Capital Gains Bonds are tax-free.
Listing in Stock Exchanges
These bonds are issued through private placement and are not listed on any stock exchanges for trading in the secondary market.
Benefits of Investing in Capital Gain Bonds
- Save Tax: Section 54EC bonds allow individuals and HUFs to save their LTCG tax liability arising from the sale or transfer of land or building after 2 years of their purchase.
- Highest Safety: These bonds are issued by top public sector companies like Indian Railway Finance Corporation Ltd (IRFC), Power Finance Corporation Ltd (PFC) and Rural Electrification Corporation Ltd (REC) having the highest credit rating of ‘AAA’ from SEBI-registered credit rating agencies like ICRA, CARE, CRISIL, etc.
Eligible Bonds Available for Tax Exemption Under Section 54EC
Rural Electrification Corporation Limited (REC bonds)
Indian Railway Finance Corporation Limited or (IRFC bonds)
Power Finance Corporation Ltd (PFC Bonds)
| Eligible Bonds | RECL | PFC | IRFC |
| Rating | AAA (CRISIL/ICRA/CARE/India Ratings) | AAA/Stable (CRISIL/ICRA/CARE/) | AAA/Stable (CRISIL/ICRA/CARE/) |
| Face Value | Rs 10,000 per bond | Rs 10,000 per bond | Rs 10,000 per bond |
| Issue Price | Rs 10,000 per bond | Rs 10,000 per bond | Rs 10,000 per bond |
| Coupon Rate | 5.25% p.a. annually | 5.25% p.a. annually | 5.25% p.a. annually |
| Minimum Investment | Rs 20,000 | 20,000 | 20,000 |
| Maximum Investment | Rs 50 lakh in a Financial Year | Rs 50 lakh in a Financial Year | Rs 50 lakh in a Financial Year |
| Tenure | 5 years | 5 years | 5 years |
| Frequency of Interest Payments | Annual | Annual | Annual |
| Interest Pay-out | 30th June of each year | 31st July of each year | 15th October of each year |
Who should invest in Capital Gains Bonds or 54EC Bonds?
The maturity proceeds of Capital Gains Bonds are not taxable. Thus, taxpayers who do not wish to purchase or construct a new residential property from the capital gains received after the sale of an asset (Land or Building) purchased before 2 years can invest their long term capital gains arising from their property sale in Capital Gains Bonds to save the LTCG tax liability.