Capital Gain Bonds under Section 54EC of Income Tax Act

To invest in 54EC capital gain bonds, the following conditions must be met:

Nature of Asset Sold: You must have sold a long-term capital asset, typically land or building.

Residency: Both resident and non-resident individuals can invest in these bonds, provided the capital gains are from assets situated in India.

Time Limit: Investment must be made within 6 months from the date of asset transfer.

Minimum Investment: Rs.10,000 (1 bond).

Maximum Investment: Rs.50 lakhs in a financial year.

These bonds are suitable for taxpayers who wish to save tax on LTCG by reinvesting the gains instead of paying tax.

Exemption Under Section 54EC

According to Section 54EC, a taxpayer's capital gains are not subject to taxation if they are invested in "long-term defined assets" within six months of the sale of a long-term capital asset, such as an immovable property or stocks and shares. The term "long-term specified assets" refers to government-notified bonds and securities, such as those issued by the Rural Electrification Corporation (REC).

However, you cannot invest more than Rs. 50 lakhs in these bonds in total. If your total capital gains are higher than Rs. 50 lakhs, you may also want to build a house and avail the benefits of Sections 54 or 54F instead of buying bonds under Section 54EC. But if you are not able to opt for either of the above options, you will have to pay LTCG tax on the remaining capital gains amount.

The bonds bought with the capital gains amount should be with the taxpayer for at least 5 years. If you sell the bonds before the end of 5 years, then the exemption granted under Section 54EC will be withdrawn and you have to pay LTCG tax on the original capital gains amount.

Note:

The National Highways Authority of India (NHAI) discontinued issuance of capital gains bonds under Section 54EC as of 2022-2023.

Capital Gain Bonds by IRFC, PFC, and REC

The bonds that are specified under Section 54EC are issued by the IRFC, PFC, and REC. The key features of these bonds are:

1. These bonds give an interest rate of 5% p.a. Income tax has to be paid on the interest accrued, however, as per the tax slab of the individual.
2. These bonds are AAA-rated, indicating their stability and security.
3. You can buy the bonds physically or in demat format.
4. Each bond costs Rs. 10,000 - which means that these bonds can be bought only in the multiples of Rs. 10,000, capped at 500. The maximum amount you can invest in these bonds is Rs. 50 lakhs.
5. These bonds are not listed on any stock exchange.
6. The documents required to buy these bonds are: self-attested copy of the PAN card, self-certified address proof copy, and 1 cancelled cheque.

Steps to Invest in Capital Gain Bonds

Follow the steps mentioned below to invest in Capital Bonds:

Step 1: Visit the websites for the respective bond (PFC, REC, and IRFC) and select the ‘direct’ option on the respective pages.

Step 2: Indicate how many forms you want to download. Download the form after entering the captcha code. Print the form now, then fill it out.

Step 3: Investors must submit their information at the designated banks together with a demand draft or an account payee check that is attached. The ability to do this activity is granted to banks like Axis Bank, HDFC Bank, State Bank of India, IDBI Bank, and IndusInd Bank among others.

You may want to buy capital gains bonds only if the amount you have made as capital gains is low. If the amount is large enough to buy or build a house, the residential property would be a better investment because of greater capital appreciation.

Section 54EC vs Section 54F

Documents Required to Invest in Capital Gain Bonds

To invest in 54EC bonds, you’ll need the following documents:

1. PAN card (mandatory for KYC)
2. Copy of Aadhaar card (for individual investors)
3. Recent passport-size photograph
4. Cancelled cheque (for ECS mandate)
5. Address proof (utility bill, passport, etc.)
6. Proof of capital gains (sale deed or ITR acknowledgment)
7. Application form (from issuing authority or online platform)

These documents help complete your KYC and support your exemption claim while filing taxes.

Tax Implications if Bonds Are Redeemed Early

54EC bonds must be held for a minimum of 5 years to retain the tax exemption benefit.

1. Early Redemption: If the bonds are sold or transferred before 5 years, the exemption under Section 54EC is revoked.
2. Tax Effect: The exempted capital gains will be added back to your taxable income in the year of sale and taxed accordingly.
3. No Loan or Pledge: Since these bonds cannot be pledged or used as collateral, premature redemption options are extremely limited.