Capital Gain Bonds

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, such bonds in India are also popularly known as Section 54EC Bonds

Capital Gain Bonds are not listed on the stock exchange. Therefore, investors have to purchase capital gain bonds directly from the issuer in a demat form or a physical form within 6 months of selling their long term capital asset. Investors can also visit authorized bank branches to fill in the original application form of Capital Gain Bond, submit the necessary documents and a cheque/demand draft.

Also Know: How to Invest in Government 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.

Also Check: Zero Coupon Bonds 

Section 54EC provides an exemption on capital gains arising from the sale/transfer of a long-term capital asset, being land, buildings, or both. Here are the provisions of Section 54EC:-

Also Check: Tax Free Bonds

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

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.

Mr. Arjun Mehta sells a long-term residential property for Rs 1.2 crore. His indexed cost of acquisition is Rs 60 lakh. Mr. Mehta invests Rs 50 lakh in REC Capital Gain Bonds within the specified 6-month period. The calculation of tax exemption under Section 54EC is as follows:

Sale Price: Rs 1.20 crore
Indexed Cost: Rs 60 lakh
Long-Term Capital Gain: Rs 60 lakh

Solution: Capital Gain: Rs 60 lakh
Amount Invested in Bonds: Rs 50 lakh
Exemption Allowed: Rs 50 lakh

The remaining Rs 10 lakh (Rs 60 lakh – Rs 50 lakh) will be taxable as long-term capital gain.