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Here is how you can reduce your tax liabilities by investing in 54EC bonds

5EC Bonds Reduce Your Tax Liabilities While Investing in Them

As Benjamin Franklin says, in life, only two things are certain: death and taxes. While you can’t control the first, as an investor, you can certainly undertake measures to reduce the latter.   

Fixed-income instruments like bonds are one of the most popular investment options for reducing tax liability. By knowing the tax implications of different types of bonds, you can save money on your tax outgoings. For this article, let’s focus on 54EC bonds and how investing in them can help you save on taxes.

What are 54EC bonds? How do they reduce your tax liability?

Have you recently sold an immovable property, or are you planning to sell one soon? If the answer is yes, you should know the tax liability. If you sell the property within 24 months of purchase, Short Term Capital Gains (STCG) tax is applicable as per your tax slab. If you sell the property after 24 months, you will have to pay a 20% Long Term Capital Gains (LTCG) tax. 

 

If you want to save tax here, the solution is to invest in 54EC bonds, also known as Capital Gains Bonds. You need to invest the sales proceeds of the property sold in 54EC bonds.

 

The primary purpose of investing in this bond category is that it offers a 100% LTCG exemption for up to Rs. 50 lakh. The only condition for this tax benefit to be applicable is if the time between the sale and bond investment is within 6 months and it is a long-term property investment.

 

A few of the popular capital gains bonds are issued by government-backed infrastructure and infrastructural development companies like Power Finance Corporation Limited and the National Highway Authority of India.

 

You should note that 54EC bonds provide LTCG exemption only on the invested amount for sale procurements of immovable property. Any gain, typically 5% to 6%, you may receive from investing in these bonds is taxable.

What are the Features of 54EC Bonds?

If you’ve sold land or a building and made a long-term capital gain, 54EC Bonds can help you save tax under Section 54EC of the Income Tax Act.

  • Invest within 6 months of selling land or building to save long-term capital gains tax under Section 54EC.

  • Issued by government-backed entities like REC, PFC, and IRFC (AAA-rated).

  • Minimum investment: ₹20,000 (2 bonds); Maximum: ₹50 Lakh per financial year.

  • Lock-in period: 5 years; bonds are non-transferable, non-redeemable before maturity, and cannot be pledged.

  • Interest rate: ~5.25% per annum, paid annually; interest is taxable, but no TDS.

  • Open to individuals, Hindu Undivided Families (HUFs), companies, and other eligible entities.

  • Available in demat and physical form.

  • Not listed on stock exchanges; low liquidity

  • Only long-term capital gains from selling land/building (held >2 years) are eligible.

 

54EC Bonds are a safe and tax-efficient option if you’ve sold a property and want to save on capital gains tax, all while earning a steady return.

How to Calculate The Tax Exemption By Investment In Tax-Saving Bonds

Let’s understand the taxation part of 54EC bonds with an example.

Suppose you have sold your old house for Rs. 85,00,000 after 5 years of purchasing it for Rs. 40,00,000/3500000. The indexation benefit on the house comes to around Rs. Rs. 50,00,000. To save taxes, you decided to invest in a 54EC bond that offers a coupon rate of 5.5% for 7 years. This is how it will work out.

 

Sale procures 

  85,00,000

Indexation on the house cost

(-50,00,000)

LTCG invested in 54EC bond

  35,00,000

LTCG liability arising from the sale of house

  0

Return on 54EC bond after 7 years

 50,90,000 (rounded off)

LTCG on 54EC bond

 15,90,000 (50,90,000 – 35,00,000)

 

If you have sold the bonds within 36 months, it would have been the case of STCG, and the gains are then added to your annual income.

Thus, the invested amount provides you with an exemption, but the interest earned on that is taxable.

How to Make an Investment in 54EC Bonds?

If you’ve recently sold a property and want to save on capital gains tax, 54EC Bonds can be a smart option. Here’s how you can invest in them, step by step:

 

  • Invest within 6 months of selling your property to save on capital gains tax.

  • Choose a government-backed issuer like REC, NHAI, PFC, or IRFC.

  • Download the application form from the issuer’s website or collect it from select banks.

  • Fill out the form and attach KYC documents (PAN, ID, address proof, cancelled cheque).

  • Submit the form with payment via cheque, demand draft, or online transfer.

  • Choose bond format – demat or physical.

  • Receive your bond certificate after processing.

 

Note: These bonds come with a 5-year lock-in period and can’t be traded on the stock exchange.

What are The Benefits of 5EC Bonds?

54EC Bonds offer several benefits for safe and tax-efficient investing:

  • Save on Taxes: You don’t have to pay tax on capital gains if you invest them in 54EC Bonds.

  • Steady Returns: These bonds offer fixed yearly interest, giving you a regular income.

  • Low Risk: They are issued by government-backed companies, making them a safe option.

  • No Wealth Tax: You don’t need to pay wealth tax on your investment in these bonds.

  • Easy to Invest: The process is simple, and you can invest online or offline.

  • Helps in Planning: Great for people who want long-term security with tax benefits.

  • Portfolio Balance: Adds a stable, fixed-income option to your investment mix.

These features make 54EC Bonds a smart choice for careful investors who want peace of mind and tax savings.

Conclusion

If you have recently sold a property and are looking for ways to reduce your tax liabilities, 54EC bonds, without a doubt, are a great choice.

Frequently Asked Questions (FAQs)

  1. What is the lock-in period for 54EC Bonds?
    54EC Bonds have a lock-in period of 5 years. This means you cannot sell, transfer, or redeem them during this time. Staying invested for the full period is necessary to enjoy the tax benefits on capital gains.

 

  1. Can 54EC Bonds be held in a Demat account?
    Yes, you can hold 54EC Bonds in demat or physical form. If you already have a demat account, it's easy to manage it there. This option offers flexibility and keeps your investments organised in one place.

 

  1. Can you redeem 54EC Bonds before maturity?
    No, you cannot redeem 54EC Bonds before the 5-year period ends. They are locked in and non-transferable. This rule ensures you remain invested for the entire duration to get the full tax exemption benefits.