Understanding Capital Gain Bonds in India  – A Comprehensive Guide

by Investing Published on: 21 June 2024 Last Updated on: 10 July 2024

Capital Gain Bonds

When you want to optimize and manage your tax liabilities, capital gain bonds are the best option for you. Capital gain bonds, also known as 54EC bonds. 

It offers you the opportunity to defer all the tax impact while you want to sell the property or land. Additionally, it provides a lucrative scope for investors like you to gain the maximum revenue and interest rates. 

You must read this article to get a clear insight about making investments in Capital gain bonds.  This will help you in reaching your goals.

What Are Capital Gain Bonds?

What Are Capital Gain Bonds

These type of bonds are capable of saving investors long-term capital gains and taxes. These are some of the specific financial instruments that make things easier for investors. This falls under section Government Act 54EC income tax act. In most cases, these are issued by specific government-backed entities like the Rural Electrification Corporation, Power Finance Corporation, and Indian Railways Finance Corporation. There are some rating agencies that give higher ratings to these bonds so that the credit risk remains less. 

Key Features Of Capital Gain Bonds

Key Features Of Capital Gain Bonds

There are several features of capital gain bonds that you must be aware of while you make your investments in them. Some of the key features of it are as follows:- 

1. Tax Benefits of Capital Gain Bonds

The primary appeal of Capital Gain Bonds lies in their tax-saving benefits. By investing in these bonds, investors can defer paying long-term capital gains tax arising from the sale of property or land. This makes them a valuable tool for tax planning.

2. Investment Limits of Capital Gain Bonds

You can make investments of a maximum of 50 lakh in this bond within a single financial year. The minimum investment amount is 10,000. Importantly, to avail of the tax benefits under Section 54EC, the investment must be made within six months of the asset’s sale.

3. Lock-In Period of Capital Gain Bonds

The lock-in period is for five years, and you cannot sell or transfer these bonds before the maturity period. You need to be patient before you make your investments in capital gain bonds. Try to figure out the best ways of making investments in it. 

4. Interest Rates of Capital Gain Bonds

Capital Gain Bonds offer a fixed interest rate of 5%, paid out annually. While this rate is relatively low, it reflects the low-risk nature of the investment.

5. Eligibility For NRIs

Non-resident Indians (NRIs) are also eligible to invest in Capital Gain Bonds, allowing them to claim tax exemptions on long-term capital gains from the sale of property in India.

Who Should Invest In Capital Gain Bonds?

Who Should Invest In Capital Gain Bonds

Capital Gain Bonds are ideal for investors who have known significant long-term capital gains from the sale of property or land and are looking to defer or minimize their tax liability. This includes both resident and non-resident Indians. These bonds are particularly suitable for those who do not plan to reinvest the proceeds in purchasing new property or land within a year of the sale.

Who Should Avoid Capital Gain Bonds?

Who Should Avoid Capital Gain Bonds

Suppose you are a type of investor who requires liquidity in their investment within one year of investments in capital gain bonds. You must avoid making investments in these bonds. The lock-in period for these bonds is five years. So, you cannot reinvest your money in these bonds before this time period. Ensure that you follow the correct process. 

Taxation Of Capital Gain Bonds

Taxation Of Capital Gain Bonds

There are several ways taxes are collected from the income of capital gain bonds. You need to be well aware of it before you start earning from capital gain bonds. 

1. Interest Income

The interest earned on Capital Gain Bonds is added to the investor’s annual income and taxed according to their marginal income tax slab rate. This means that the post-tax returns may be even lower, particularly for those in higher tax brackets.

2. Capital Gains

Since the bonds cannot be transferred before maturity, no capital gains are released from selling these bonds. Consequently, there is no capital gains tax applicable on these bonds.

Risks And Considerations

Risks And Considerations

There are several kinds of risks and considerations you need to consider before opting for capital gain bonds. Some of the eminent risk areas in it are as follows:- 

1. Low-Interest Rate 

One of the primary risks associated with Capital Gain Bonds is the relatively low interest rate of 5%. The real returns can be minimal or even negative when adjusted for inflation and taxes.

2. Inflation Risk of Capital Gain Bonds

If this bond faces a straight five-year inflation period, then the power of returns from these bonds will be lower. You must check the market situation before investing in these bonds. 

Advantages Of Making Investments In Capital Gain Bonds

Advantages Of Making Investments In Capital Gain Bonds

There are several advantages of investing in capital gain bonds, which you must know before making your investments. 

1 . Tax Exemption in Capital Gain Bonds

The foremost advantage is the ability to claim tax exemptions on long-term capital gains up to Rs. 50 lakh in a financial year.

2 . Safety  

Since government-backed entities issue these bonds, they carry a high degree of safety regarding credit default risk. This makes them a secure investment option.

3 . No Price Or Liquidity Risk 

Given that these bonds cannot be sold or traded before the maturity period, investors are not exposed to market price fluctuations or liquidity risks that affect other types of bonds.   

How To Invest In 54EC Capital Gain Bonds? 

How To Invest In 54EC Capital Gain Bonds 

There are several procedures you need to follow before you make your investments in Capital Gain bonds. Some of the key factors that you should take care of here are as follows:-    

1. Buy Capital Gain Bonds From The Issuer 

Capital Gain bonds (54EC) are not listed on the stock exchange. So, you have to buy these bonds from the issuer directly, either in a demat form or in a physical form. This is the only way to purchase and make investments in capital gain bonds in India. 

Now, the main issue here is that these bonds are not listed on the stock exchange, so investors like you think that these are not legit bonds. The reality is just the reverse, as you can gain maximum returns from these bonds within a shorter span of time. 

2. Obtain The Application Form 

The second and most important step in making investments in 54EC capital gain bonds is to visit your nearest preferred bank. As banks can provide you with the application form, you should also inquire about its offerings as well. 

The bank will guide you through the entire application process and will also tell you about the latest offerings of these bonds. You should make informed decisions while making investments in capital gain bonds. 

3. Fill Out The Forms 

The third step after getting the application form is to fill in the necessary details about yourself. You need to provide all your personal credentials, such as name, contact number, address proof, Aadhar card number, PAN number, broker name, bank account number, etc. 

You should also provide details of your demand draft bank account number and specify the number of bonds you want to buy. After you fill out this form, your application process is partially complete. 

4. Attach All The Required Documents 

After you complete the form fill-up process, you need to attach all the essential documents. Some of the documents that you should attach from your end are as follows:- 

  • Aadhar Card. 
  • PAN card. 
  • Canceled Cheque. 
  • You can also make use of your driver’s license to provide proof of your ID. 

5. Submit The Completed Application 

The fifth and most important step that you must follow is to complete the application form by attaching all documents. Along with supporting documents, you need to attach your demand draft or the account payee cheque. 

Thus, you can collect all the documents from the bank where you applied for capital gain bonds. Therefore, after the completion of this process, your application process is 90% complete. 

6. Complete The Verification Process 

The last step that stands in the way of the application process is the verification of your application. After the verification process is completed, you will receive your bonds in your designated demat account or physical form. 

You must understand these facts to reach your requirements easily. These are some of the crucial steps you have to follow to get your Capital Gain bonds. 


Capital Gain Bonds, or 54EC bonds, offer a compelling tax-saving opportunity for investors with long-term capital gains from the sale of property or land. The best part of capital gain bonds is they come with some lucrative offers like low interest rates and significant lock-in periods. 

If you make investments in Capital Gain bonds, then you will receive significant Lock-in periods and attractive risk-averse options. 

You can share your views and comments with us in our comment box.  If you want to get the maximum benefits out of it. These are some of the key factors that you should be well aware of.

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Ankita Tripathy loves to write about food and the Hallyu Wave in particular. During her free time, she enjoys looking at the sky or reading books while sipping a cup of hot coffee. Her favourite niches are food, music, lifestyle, travel, and Korean Pop music and drama.

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