What is the lock-in period for 54EC bonds?

Investors who sell long-term capital assets often find themselves liable for capital gains tax. However, under certain sections of the Income Tax Act, taxpayers have the option to seek exemptions from this tax.

One of the most notable provisions is Section 54EC. By investing in specified bonds, commonly referred to as 54EC bonds, you can significantly reduce your long-term capital gains tax liability. 

For those planning to enter the investment market, it is essential to open a trading account to manage such transactions. If you are wondering how to invest in bonds in India or the features of debenture bonds, read on for more information.

What are 54EC Bonds?

Section 54EC provides tax relief to taxpayers who have realised capital gains from selling long-term immovable properties like land, buildings, or both. By investing those gains in specific bonds, you can defer the tax liability.

These bonds are issued by organisations such as the Rural Electrification Corporation (REC), National Highways Authority of India (NHAI), Indian Railway Finance Corporation (IRFC), and Power Finance Corporation (PFC). The maximum amount you can invest in these bonds in any financial year is ₹50 lakh.

The Lock-in Period for 54EC Bonds

Before 2018, the lock-in period for 54EC bonds was only three years. However, this was extended to five years, starting in April 2018, as a measure to encourage long-term investments.

The lock in period is the duration during which you cannot sell, transfer, or use the bonds as collateral for loans. If you do not meet this condition, the tax exemption will be revoked, and the amount that was earlier exempted will become taxable as long-term capital gains.

Hence, once you invest in these bonds, you must hold them for a minimum of five years to retain your tax exemption benefit. The bonds can only be redeemed after the completion of the lock-in period.

Eligibility and Investment Limit

To claim the capital gains exemption, you must fulfil the following conditions:

• The asset sold must be a long-term capital asset, held for a minimum of 24 months.
• You are required to invest in 54EC bonds within six months from the date of sale.
• The maximum amount you can invest in a financial year is ₹50 lakh.
• You cannot use the bonds as security or collateral for loans during the lock-in period of five years.

These bonds offer a fixed interest rate, typically ranging between 5% and 6%, and while the interest is taxable, the principal amount enjoys tax exemption under Section 54EC.

How to Invest in 54EC Bonds in India

If you are interested in how to invest in bonds in India, particularly 54EC bonds, it’s a straightforward process. These bonds are not listed on the stock exchange, meaning they cannot be purchased or traded through traditional stock exchanges. However, they can be bought directly from authorised financial institutions.

Here’s how to invest:

1. Download the application form from the websites of REC, PFC, NHAI, or IRFC.
2. Fill out the form as per the instructions.
3. Submit the form along with a demand draft or cheque to the designated bank branch (banks like Axis Bank, HDFC Bank, SBI, ICICI Bank, and others accept these applications).
4. You can also pay via NEFT/RTGS and mention the transaction reference number in your application.

Once you have completed these steps, your investment will be processed, and you will receive your bond certificates.

Benefits of 54EC Bonds

• Tax Benefits: The primary advantage of investing in 54EC bonds is the capital gains tax exemption. By investing the capital gains within six months of selling your property, you can avoid paying long-term capital gains tax.
• Safe Investment: These bonds are considered low-risk as they are issued by government-backed entities such as NHAI and REC, ensuring the safety of your principal.
• Fixed Returns: Although the returns are relatively modest, typically between 5% and 6%, they offer fixed interest, which is an attractive feature for risk-averse investors.
• Investment Limit: The ₹50 lakh investment limit allows taxpayers to shelter a significant portion of their capital gains from tax.

Drawbacks of 54EC Bonds

• Low Liquidity: You cannot withdraw or use the funds until the end of the lock-in period, making this a restrictive investment option.
• Taxable Interest: While the principal amount is exempt from tax, the interest earned on the bonds is taxable, which reduces the overall return on investment.
• Investment Limit: While ₹50 lakh is a substantial sum, if your capital gains exceed this limit, you will still be liable to pay tax on the remaining amount.

Conclusion

Investing in 54EC bonds is an effective way to reduce your tax liability on long-term capital gains from the sale of immovable property. However, the five-year lock-in period must be adhered to, and you should be aware that while the principal investment enjoys tax exemption, the interest earned is taxable.

If you’re looking for ways to invest in bonds in India and wish to avoid capital gains tax, 54EC bonds offer a reliable and government-backed option. However, they may not be suitable for everyone due to their long lock-in period and relatively low liquidity.