Capital Gain Bonds (54EC Bonds) in India

The notified issuers right now are REC, PFC, IRFC and HUDCO. All AAA-rated. All paying 5.25% a year. The catch: you have six months from the sale to invest, the lock-in is five years, and the cap is Rs. 50 lakh per financial year.

GoldenPi lists currently open 54EC issues on a SEBI-registered Online Bond Platform. KYC, payment and demat holding sit in one place.

What are Capital Gain Bonds?

Capital Gain Bonds are also called 54EC bonds. They are AAA-rated debt securities issued by select PSUs and notified under Section 54EC of the Income Tax Act, 1961. The exemption applies only to long-term capital gains from immovable property you have held for more than 24 months.

The currently notified issuers are: Rural Electrification Corporation (REC), Power Finance Corporation (PFC), Indian Railway Finance Corporation (IRFC) and Housing and Urban Development Corporation (HUDCO).

NHAI used to be a key issuer here. It stopped accepting new 54EC applications on 3 September 2022. If you are searching for "invest in NHAI bonds" or the NHAI bonds interest rate, the live options today are REC, PFC, IRFC and HUDCO.

Key Features of 54EC Bonds

All four issuers run on near-identical terms. Here is what you sign up for

How Section 54EC Works

1. You sell a property you have owned for more than 24 months. The profit is a long-term capital gain.
2. Within six months, you put part or all of that gain (up to Rs. 50 lakh) into 54EC bonds.
3. The amount you invest is exempt from LTCG tax. Anything beyond it gets taxed at 12.5% without indexation.
4. You hold the bonds for five years. Pull the money out earlier and the gain you originally saved tax on becomes taxable in that year.

Here’s an example - You sell a property and book Rs. 80 lakh of LTCG. You move Rs. 50 lakh into REC capital gain bonds within six months. Tax now applies only on the remaining Rs. 30 lakh. The Rs. 50 lakh in bonds earns 5.25% a year for five years.

Capital Gain Bonds vs Paying LTCG Tax Outright The real comparison is between locking Rs. 50 lakh at 5.25% for five years and paying the 12.5% tax now, then investing the rest somewhere else.

54EC works when you are unsure what else to do with the money for five years, or when capital safety matters to you more than yield. It works less well if you have a clear plan to earn more on the post-tax amount somewhere else.

Benefits of 54 EC Capital Gain Bonds

The pitch is narrow but specific:

• Legal tax exemption on up to Rs. 50 lakh of LTCG per financial year.
• AAA credit, backed by the government. Default risk is effectively zero.
• 5.25% interest, paid annually to your bank account.
• Four issuers to choose from (REC, PFC, IRFC, HUDCO). You can split between them if you want.
  
  

Risks to Understand

The AAA rating means default risk is very low. There are two other things that matter.

1. Liquidity - the five-year lock-in is strict, so you cannot sell, transfer or pledge these bonds, and your money stays parked for the full term.
2. Opportunity cost - the 5.25% coupon is low while other AAA bonds pay 7.5% to 8%, and the math only works once you factor in the 12.5% LTCG you save upfront.

The phrase "nhai tax free bonds" refers to older NHAI bonds issued between 2011 and 2016, which were a different product: listed on exchanges and tax-free on interest. 54EC bonds are not tax-free; the interest is taxed at slab rate, and only the capital gain is exempt.

How to Buy 54EC Bonds Online on GoldenPi

GoldenPi is a SEBI-registered Online Bond Platform Provider. Buying 54EC bonds online is straightforward:

1. Log in to your KYC-verified account.
2. Filter for 54EC under Capital Gain. Each listing shows the issuer, coupon and tenure.
3. Pick the issuer (REC, PFC, IRFC or HUDCO) and the amount.
4. Pay via NEFT or RTGS from your linked bank account.
5. Get the bonds in demat or physical form, whichever you prefer.

You will need a self-attested PAN, address proof and a cancelled cheque. Complete the investment within six months of the property sale to qualify under Section 54EC.

Taxation

The capital gain you invest under Section 54EC is exempt from tax in the year of the property sale. Hold the bonds for the full five years and your principal comes back to you tax-free. Break the lock-in early and the gain you originally saved tax on becomes taxable in that year as LTCG.

The 5.25% interest is taxed at your slab rate as income from other sources. TDS applies per the issuer's rules.

Top 5 Capital Gain Bonds (54EC Bonds) in India