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Capital Gain Not to Be Charged on Investment in Bonds

Section 54EC provides that if you earn long-term capital gains from the sale of a capital asset (mainly land or building or both) and invest the whole or part of the gains in specified bonds within the prescribed time, the capital gain will be exempt from tax to the extent of investment made.

These bonds are issued by government-backed bodies and are considered very safe. The main purpose of this section is to encourage investment in infrastructure and housing development projects.

This section is particularly useful for those who sell immovable property and want to protect their gains from taxation while also investing in safe, fixed-return instruments.

 

Eligibility Criteria

You can claim the benefit of Section 54EC if:

  1. You are a taxpayer – individual, HUF, company, or any other entity.
  2. The capital asset sold is a long-term asset (held for more than 24 months in the case of land/building).
  3. The capital gain arises from the sale of land or building or both (from A.Y. 2019-20 onwards, Section 54EC applies only to land or building, not to other assets).
  4. You invest the capital gains in notified bonds within the prescribed period.

Which bonds currently qualify (updated list — 2025)

The government notifies eligible issuers from time to time. As of August 10, 2025, the commonly available / notified issuers include:

  • REC (Rural Electrification Corporation Ltd.) — several series issued over the years.
  • PFC (Power Finance Corporation Ltd.) — regular issuer of 54EC capital-gain bonds.
  • IRFC (Indian Railway Finance Corporation Ltd.) — permitted issuer.
  • NHAI (National Highways Authority of India) — has issued 54EC bond series; application materials and notices are published by NHAI.
  • HUDCO (Housing & Urban Development Corporation Ltd.) — notified by CBDT as eligible (Notification No. 31/2025, effective 1 April 2025).
  • IREDA (Indian Renewable Energy Development Agency Ltd.) — recently notified by CBDT; notification effective 9 July 2025 (aimed at funding renewable projects).

 

Time Limit for Investment

  • You must invest within 6 months from the date of transfer of the asset.
  • If the 6-month period crosses the end of the financial year, you can still invest in the next financial year within the 6-month window.

Amount of Investment & Exemption Limit

  • Maximum amount you can invest in a financial year: ₹50 lakh.
  • If you have capital gains exceeding ₹50 lakh, you can invest only up to this limit, and exemption will be restricted proportionately.
  • You can split investment across two financial years (if the 6-month period covers two years) but still the overall limit remains ₹50 lakh.

Lock-In Period

  • The investment in these bonds has a lock-in period of 5 years (earlier it was 3 years, but changed from A.Y. 2019-20).
  • You cannot sell, convert, or pledge these bonds before the completion of 5 years, otherwise, the exemption claimed will be withdrawn and taxed in the year of violation.

Points every taxpayer asks

Interest — is it tax-free?

No. Interest earned on 54EC bonds is taxable as income (under “Income from Other Sources”) in the year it accrues/gets paid. Typically issuers do not deduct TDS on interest; you must include it in your return.

Can NRIs invest?

Yes — many issuers permit NRIs to subscribe (usually via NRO accounts and subject to RBI/other rules). Check the issue prospectus for NRI terms.

What if I invest after 6 months?

Investment after six months from transfer does not qualify for exemption under Section 54EC. Plan the sale and subscription timelines (banks/issuers sometimes run “on-tap” or limited windows).

Minimum / maximum investment details

  • Maximum that qualifies for exemption = ₹50,00,000 per financial year.
  • Minimum varies by issuer (often one bond = ₹10,000) — check the issue terms.

 

Short worked example (clear math)

  • Sale price (property): ₹1,20,00,000 (₹1.2 crore)
  • Indexed cost of acquisition: ₹60,00,000
  • LTCG = ₹1,20,00,000 − ₹60,00,000 = ₹60,00,000.

You invest ₹50,00,000 of this LTCG into qualifying 54EC bonds within 6 months:

  • Exempt under Section 54EC: ₹50,00,000.
  • Remaining taxable LTCG: ₹60,00,000 − ₹50,00,000 = ₹10,00,000 — this is taxable as long-term capital gain (apply the LTCG tax rate and cess as applicable).

(Always compute indexation using the official CII for the years concerned — save your indexation working papers for ITR / assessment.)

Documents to keep for 54EC

  • Sale deed and evidence of sale consideration (bank transfer, receipt).
  • CII-based LTCG computation worksheet (year of purchase, year of sale).
  • Bond application form, payment confirmation (cheque/NEFT/RTGS), allotment letter / certificate or Demat credit.
  • Bond certificate/statement showing issue date and redemption date.
  • PAN, KYC documents used for subscription (as per issuer requirements).

 

Conclusion

Section 54EC is a great option for taxpayers looking for safe, government-backed investments and a way to save tax on long-term capital gains from the sale of land or building.
By adhering to the timelines, investment limits, and lock-in requirements, you can legally reduce your tax burden and contribute to infrastructure development in India.

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