Capital Gain Bonds (54EC)

In India, there are two types of financial instruments: those that are linked to market performance and those that provide a fixed income. The former category includes financial instruments like equity shares, equity mutual funds, commodities, etc. On the other hand, the category of fixed-income instruments include fixed deposits and debt securities like corporate and government bonds, debentures, etc. Capital Gain Bonds fall under the category of fixed income securities.

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    What are 54EC Bonds?

    54EC bonds, also called capital gains bonds, are financial instruments that allow for tax exemptions under 54EC to its investors. These tax saving bonds are fixed income bonds issued by the government organisations. Those organisations include the Indian Railway Finance Corporation Limited (IRFC), Power Finance Corporation Limited (PFC), and the Rural Electrification Corporation Limited (REC).

    By investing in these bonds, investors who have long term capital gains can save capital gain taxes on these bonds. That said, the interest on these tax bonds are fully taxable. The bonds have a lock-in period of 5 years and a maturity period of 10 years. These bonds are considered to be a safe investment option as they are issued by government-owned organisations.

    How Capital Gains Bonds Help in Tax Exemptions?

    Capital Gains bonds or 54ec bonds can help you with claiming tax benefits if you do the following.

    Invest the entire amount realised from the capital gains within 6 months of the date of transfer in eligible bonds. It’s worth noting that gains should be generated from an asset that is eligible for long term capital gain, like equity or real estate.

    To claim the capital gain tax exemption, the 54EC bonds cannot be sold, exchanged, or used as collateral for a loan within 3 years of purchase, otherwise the tax benefit will be forfeited.

    In case, if your investment in the bond is less than your capital gains relayed, only proportionate capital gains would be exempt.

    The investment must be held for at least 5 years.

    Features of Capital Gains Bonds

    Issued by IRFC, PFC & REC

    5-year lock-in period

    Redeemed at the end of the tenure

    Not traded on the stock exchanges

    Secure investments backed by public sector enterprises

    Minimum investment is Rs.10,000 & maximum investment amount is Rs.50 lakhs for a financial year

    Ownership not the bonds cannot be transferred from one person to another

    IRFC Capital Gain Bonds

    • Indian Railway Finance Corporation is one of the main financing arm of the Indian Railways.
    • It was established in December of 1986 for mobilising funds from domestic and foreign capital markets.
    • IRFC is a Schedule .A’ Public Sector enterprise under the purview of the ministry of Railways.
    Company nameRatingROI (%)TenureMinimum ApplicationMaximum ApplicationTax StatusTransferabilityMode of InterestInterest Payable on
    5 Years2 Bonds500 BondsTaxableNot allowedAnnually15th Oct

    PFC Capital Gain Bonds

    • The Power FInance Corporation (PFC) is controlled by the Ministry of Power.
    • The PFC was given the title of Navratna CPSE in October of 2021, and it plays a crucial role in the rise of Indian as a global player.
    • It’s a leading non-banking financial corporation to finance the Indian power sector.
    Company nameRatingROI (%)TenureMinimum ApplicationMaximum ApplicationTax StatusTransferabilityMode of InterestInterest Payable on
    5 Years2 Bonds500 BondsTaxableNot allowedAnnually31st July

    REC Capital Gain Bonds

    • Rural Electrification Corporation Limited (REC) is a Navratna Company functions under the control of the Ministry of Power.
    • It’s a public infrastructure finance company that came into being in 1969 to serve India’s growing demands of the power sector.
    • The company finances and encourages rural electrification projects across India.
    Company nameRatingROI (%)TenureMinimum ApplicationMaximum ApplicationTax StatusTransferabilityMode of InterestInterest Payable on
    5 Years2 Bonds500 BondsTaxableNot allowedAnnually30th June

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    Frequently Asked Questions about Capital Gains Bonds