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Section 54EC- Deduction on LTCG Through Capital Gain Bonds

Updated on:  

08 min read

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

How to calculate the tax exemption by investment in tax saving bonds

Assuming that an immovable property is sold at Rs. 70 lakh after a long term period of 42 months from the date of acquisition. The indexed cost of acquisition is 46 lakh and indexed cost of improvement is Rs. 10 lakh. Calculate the capital gain that is taxable after claiming exemption in below two cases:

i.   Rs. 14 lakh invested in REC bonds within 6 months

ii.  Rs. 8 lakh invested in NHAI bonds within 6 months

I. Rs. 14 lakh invested in REC bonds within 6 months

ParticularsAmount (Rs.)
Sale consideration 70 lakh 
Less: Indexed cost of acquisition46 lakh
Less: Indexed cost of improvement10 lakh
Long-term capital gain14 lakh
Less: Investment in REC bonds 14 lakh
Taxable long-term capital gainNil

II. Rs. 8 lakh invested in NHAI bonds within 6 months

ParticularsAmount (Rs.)
Sale consideration 70 lakh 
Less: Indexed cost of acquisition46 lakh
Less: Indexed cost of improvement10 lakh
Long-term capital gain14 lakh
Less: Investment in REC bonds 8 lakh
Taxable long-term capital gain6 lakh

In case if the capital gain bonds are converted into cash before the period of maturity, then the amount so invested on which tax exemption was claimed, shall be taxable as long-term capital gain in the year of conversion.

For example, in above case if the bonds are redeemed before the maturity date, say in the financial year 2020-21, then Rs. 8 lakh shall be taxable as long-term capital gain in the financial year 2020-21.

How to make investment in 54EC bonds

These bonds are not listed in the stock exchange. Hence you can buy them by the issuer directly either in a demat form or a physical form. Let us understand how to invest in the above mentioned bonds:

  • Step 2: Choose the‘ direct’ option on the download page.
  • Step 3: Select the number of forms to download.
  • Step 4: Enter the captcha and download.
  • Step 5: The form downloads in ZIP format.
  • Step 6: Unzip and extract the form
  • Step 7: Print the form and fill as per the given instructions.
  • Step 8: Investors should attach either a demand draft or account payee cheque and necessary enclosures at the designated branches of collecting banks – Axis Bank, Canara Bank, State Bank of India, HDFC Bank, ICICI Bank, IDBI Bank, IndusInd Bank or Yes Bank.
  • Step 9: You can also directly deposit the amount in the respective collection account by way of NEFT/RTGS and invariably fill the application forms as given on the website online and mention the UTR no. at space provided in the application form. 

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