Section 54EC Bonds: Save Tax on Property Sale
Section 85 of the Income-tax Act, 2025 (old section 54EC) exempts the long-term capital gain on selling land or a building if you invest it within six months in specified bonds, currently issued by REC, PFC, IRFC and HUDCO. The ceiling is Rs 50 lakh, the lock-in is five years, and the coupon is 5.25% a year, which is fully taxable.
Key takeaways
- Only gains from land, buildings or both qualify, since the Finance Act 2018. Gains on shares, gold or funds can't go into these bonds.
- You invest the capital gain, not the sale price, within six months of the transfer.
- The Rs 50 lakh cap covers the year of sale and the next financial year together.
- The 5.25% interest is taxed at your slab rate; no TDS is cut, so you pay it yourself.
- Selling, redeeming early or borrowing against the bonds within five years brings the exempted gain back into tax.
Where section 54EC sits in the new Act
From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act. Section 54EC became section 85, "capital gains not to be charged on investment in certain bonds". The bonds are still called 54EC bonds by the issuers and brokers, and sales before April 2026 are still claimed under the old section. The house-based reliefs moved too: section 54 is now section 82 and section 54F is section 86.
One change is worth knowing if you own commercial property through a business. Commentators on the new Act note that gains on depreciable assets, which the law treats as short-term, no longer get the exemptions the old regime allowed. If you've been claiming depreciation on the building, check the position before relying on section 85.
Who issues the bonds, and on what terms
| Issuer | Coupon | Tenure | Minimum | Status |
|---|---|---|---|---|
| REC Ltd | 5.25% a year | 5 years | Rs 20,000 (2 bonds of Rs 10,000) | Open |
| Power Finance Corporation (PFC) | 5.25% a year, paid on 31 July | 5 years | Rs 20,000 | Open |
| Indian Railway Finance Corporation (IRFC) | 5.25% a year, paid on 15 October | 5 years | Rs 20,000 | Open |
| HUDCO | 5.25% a year | 5 years | Rs 20,000 | Notified for bonds issued from 1 April 2025 |
| NHAI | n/a | n/a | n/a | No new issues since September 2022 |
PFC's bonds carry AAA ratings from CRISIL, CARE and ICRA. All the issuers are government-owned, so default risk is low; the real costs are the low coupon and the lock-in. The bonds are non-transferable and can't be pledged. Check the issuer's current series before paying, since coupons are fixed series by series.
The rules that decide your exemption
Land or building, held long-term
The original asset has to be land, a building or both, and long-term: held more than 24 months. A flat, a plot, a shop, an office or urban agricultural land all qualify. Gains on shares or gold never did after 2018, however large.
Six months from the transfer
The money has to reach the issuer within six months of the date of transfer, usually the date the sale deed is registered. There's no Capital Gains Account Scheme route here; the account only protects house-purchase exemptions. Issuers fix a deemed date of allotment by the month, so pay well before the last week of the window rather than on its final day.
The Rs 50 lakh ceiling
Before 2014 some sellers invested Rs 50 lakh in one financial year and another Rs 50 lakh in the next, both inside six months, and tribunals such as the Bangalore bench in Ramesh V. Shetty upheld that for earlier years. The Finance (No. 2) Act, 2014 closed the gap from assessment year 2015-16: the investment from transfers in a financial year, made in that year and the next, can't exceed Rs 50 lakh in total. Section 85 keeps the Rs 50 lakh ceiling.
Five years, untouched
If the bonds are transferred or turned into money within five years of acquisition, the exempted gain is treated as long-term capital gain of that year. Taking a loan against them counts as conversion on the day of the loan. Before 2018 the lock-in was three years.
Applying for the bonds
- Work out the gain. Sale price minus expenses minus cost (or indexed cost, where you've chosen the 20% route on land bought before 23 July 2024). Our capital gains tax guide covers the arithmetic.
- Pick an issuer and get the current series' application form from its website, a bank branch or broker that distributes it. Several banks and brokers take applications online.
- Pay from your own account by cheque, NEFT or RTGS, with PAN, address proof and a copy of the sale deed if asked. Choose demat or physical form; physical certificates and demat credit both take several weeks after allotment.
- Keep the allotment letter or statement and report the exemption in the capital gains schedule of your return.
- Report the interest every year as income from other sources.
A worked example
You sell a flat in August 2026 for Rs 1.5 crore. After costs and your purchase price, the long-term gain is Rs 80 lakh, taxed at 12.5% plus 4% cess, which is 13%.
| No relief | Rs 50 lakh in bonds | |
|---|---|---|
| Gain exempt under section 85 | Nil | Rs 50,00,000 |
| Taxable gain | Rs 80,00,000 | Rs 30,00,000 |
| Tax at 13% | Rs 10,40,000 | Rs 3,90,000 |
| Tax saved | n/a | Rs 6,50,000 |
Now the interest. Rs 50 lakh at 5.25% pays Rs 2,62,500 a year. In the 30% slab with cess (31.2%), that's Rs 81,900 of tax, leaving Rs 1,80,600, a post-tax yield of about 3.6%. Over five years you collect Rs 9,03,000 after tax and get the Rs 50 lakh back.
The alternative is to pay the Rs 6.5 lakh tax and invest the remaining Rs 43.5 lakh freely. To end up with the same Rs 59.03 lakh after five years, that money would need to earn about 6.3% a year after tax. Few safe instruments do that after tax, so the bonds usually win for a seller who wants safety. For someone who would put the money into equity funds for the long term anyway, the case is thinner. In a lower slab the interest is taxed less, which tilts it further towards the bonds.
Section 85 against section 82 and section 86
| Section 85 (old 54EC) | Section 82 (old 54) | Section 86 (old 54F) | |
|---|---|---|---|
| Asset sold | Land or building | Residential house | Any asset except a house |
| What you invest | The gain | The gain | The net sale price |
| Into | Specified bonds | One house (two, once, if gain is up to Rs 2 crore) | One house |
| Deadline | 6 months | 1 year before, 2 after, 3 to build | Same as 82 |
| Cap | Rs 50 lakh | Rs 10 crore | Rs 10 crore |
| Lock-in | 5 years | 3 years | 3 years |
The reliefs can be combined on one sale: bonds for up to Rs 50 lakh of the gain and a house for the rest. Selling a plot or shop and buying a home instead? Our guide to the section 54F exemption explains why that route needs the full sale price invested, and the Capital Gains Account Scheme page covers parking money for a house while you look.
When the bonds don't make sense
- Your gain is well above Rs 50 lakh and you don't want a house. The bonds shelter a fixed slice; everything above it is taxed.
- You need the money inside five years. There's no premature exit that keeps the exemption.
- You expect to earn well above 6% after tax elsewhere. That's the break-even in the example; a seller who would hold equity funds for years anyway may prefer to pay the tax and keep control.
- The gain came from a sale you're reinvesting in property anyway. The house reliefs have no Rs 50 lakh cap and give you an asset that can earn rent.
- You're an NRI selling Indian property. NRIs can invest, but the buyer deducts TDS when you sell, so recovering tax on the part the bonds exempt means a refund claim or a lower-deduction certificate. Plan it with your CA; our note on NRI property investment covers the wider picture.
Frequently asked questions
What is the current interest rate on 54EC bonds?
REC, PFC, IRFC and HUDCO all offer 5.25% a year on their current series, paid annually. The rate is fixed for the five-year term of the series you buy into. The interest is taxable at your slab rate, and because no TDS is deducted you have to include it in your return and pay any tax due yourself.
Can I invest more than Rs 50 lakh in 54EC bonds by splitting it over two years?
Not for sales from assessment year 2015-16 onwards. The Finance (No. 2) Act, 2014 capped the total investment from a financial year's transfers, made in that year and the next, at Rs 50 lakh. Rulings allowing Rs 1 crore across two years apply only to earlier sales. Section 85 of the 2025 Act keeps the same ceiling.
Can I claim 54EC on the sale of shares or gold?
No. Since the Finance Act 2018 the bond exemption covers only long-term gains on land, buildings or both. If you sell shares, gold or mutual funds and want relief, the route is buying a residential house under section 86 (old 54F), which requires investing the net sale price rather than only the gain.
What happens if I need the money before five years?
The bonds can't be sold, transferred or pledged, and there's no early redemption that keeps the tax benefit. If they're converted into money within five years, or you borrow against them, the gain exempted earlier is taxed as long-term capital gain in that year. Treat the Rs 50 lakh as unavailable until maturity.
Is the six-month deadline counted from the agreement or the registration?
From the date of transfer, which for most sales is the date the sale deed is registered. Where possession was handed over earlier under an agreement, the transfer date can be argued to be earlier, so the safest course is to invest within six months of whichever date comes first.
If you're weighing bonds against buying another property with the proceeds, the Realty Hunting team can help you compare what each option leaves you with.
Sources
The figures and rules in this post were researched against these sources. Government and regulator sources are listed first. Rates, fees and rules change; check the current figure with the authority before you pay or sign.
