How can you invest LTCG in Section 54EC bonds?

When an investor sells a residential property and makes long-term capital gains (LTCG), the tax liability can be significant. However, the Income Tax Act provides some relief, allowing taxpayers to save on capital gain tax by investing the profit earned in capital gain bonds. These bonds are referred to as Section 54EC bonds.

Tax-saving options

Capital gain bonds are tax-saving instruments that are issued by entities backed by the government, including REC, National Highways Authority of India (NHAI), Power Finance Corporation (PFC), and Indian Railway Finance Corporation (IRFC).

Eligibility

To be eligible, the capital gains should arise from the sale of a long-term asset, such as land or a building. The investment must be made within six months of the date of transfer of the property.

Investment limit

The maximum investment allowed in capital gain bonds is Rs 50 lakh per financial year. The bonds come with a lock-in period of five years and premature redemption is not permitted. The interest rate offered typically ranges between 5% and 5.25% per annum.

How to invest

Investors can purchase these bonds either online through the websites of issuing institutions or offline via designated bank branches. The required documents include PAN card, address proof, and details of the property sold. The investment must be made from the capital gains portion only, not the total sale proceeds.

Points to note

• Capital gains not invested within the stipulated six-month window will be taxable at applicable rate.
• Interest earned on Section 54EC bonds is not tax-free and must be disclosed in the annual tax return.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta