54EC capital gain bonds: rate, lock-in and how to save LTCG tax on property

What are 54EC capital gain bonds?

54EC bonds are fixed-income bonds named after Section 54EC of the Income-tax Act, 1961. They exist for one purpose: to let you shelter a long-term capital gain from selling immovable property. Reinvest the gain into these bonds within six months of the sale, and that gain becomes exempt from LTCG tax. Only a handful of public-sector companies are allowed to issue them — REC, PFC, IRFC and, since April 2025, HUDCO (for bonds issued on or after 1 April 2025).

The mechanics are simple. You can shelter up to ₹50 lakh of gain — a per-assessee aggregate cap, not a per-sale one. In return, the money is locked in for five years at a fixed coupon (5.25% as of July 2026). The bonds are AAA-rated and issued by public-sector companies, and they are not market-linked; they are redeemed at par at maturity, so the principal is as safe as the issuer's AAA credit standing — not government-insured, but about as secure as a large-PSU fixed deposit.

The trade-off is built in. At 5.25% (the rate as of July 2026) the coupon is low, and the interest is fully taxable at your income-tax slab. This is not a return-chasing product. It is a tax shelter with strong capital safety attached, and the honest question is whether the tax you save beats what you'd earn by simply paying the tax and investing the rest — which we work through below.

• Issued by REC, PFC, IRFC and HUDCO — public-sector (PSU), AAA-rated, not market-linked; redeemed at par at maturity.
• Coupon: 5.25% p.a. as of July 2026 — once you buy it is fixed for your 5-year term, but the rate on new tranches is reset periodically by each issuer's board, so confirm the live rate before investing.
• Lock-in: 5 years. Non-transferable; you cannot pledge them or take a loan against them.
• Cap: shelters up to ₹50 lakh of capital gain per assessee, aggregated across the financial year of sale and the next one.
• Eligible gain: LTCG on sale of land or building only — not shares, mutual funds or gold.

Who can use 54EC — the post-2018 rules

Section 54EC is much narrower today than it was before the Finance Act 2018. Two changes matter most.

First, the eligible asset. From 1 April 2018, the exemption applies only to LTCG on the sale of land or a building (or both) — immovable property. Before 2018 you could use 54EC for the gain on almost any long-term asset. That door is closed. If your gain is from listed shares, equity mutual funds, gold, or unlisted shares, 54EC does not help you.

Second, the lock-in. For investments made on or after 1 April 2018 the lock-in is five years (it was three years earlier). The bonds are non-transferable, and you cannot pledge them or borrow against them during that period.

Two conditions apply to everyone. You must invest within six months of the date of transfer (the sale), and the total exemption is capped at ₹50 lakh. That ₹50 lakh is a per-assessee aggregate ceiling across the financial year of transfer and the subsequent financial year (second proviso to Section 54EC, inserted by the Finance Act 2014) — you cannot beat it by splitting the investment across the two years, and if you sell more than one property those sales share the same single ₹50 lakh ceiling. The property must also have been held long enough to qualify as long-term (more than 24 months for immovable property).

• Eligible gain: LTCG on land/building (immovable property) only, since 1 April 2018.
• Not eligible: shares, equity mutual funds, gold, unlisted shares, other bonds.
• Deadline: invest within 6 months of the date of sale/transfer.
• Cap: ₹50 lakh per assessee in aggregate — spans the FY of sale and the next FY, and multiple property sales share the one ceiling.
• Lock-in: 5 years; non-transferable; no loan or pledge against the bonds.
• The property must be long-term (held more than 24 months) to qualify.

Current issuers and the 5.25% coupon

Four issuers currently offer 54EC bonds, all at the same 5.25% coupon as of July 2026. That rate is not a permanent feature: once you invest it is locked for your five-year term, but each issuer's board resets the coupon on new tranches from time to time, so treat 5.25% as today's rate rather than a fixed-forever one, and confirm the live coupon on the REC, PFC, IRFC or HUDCO page (or a bond platform) before you apply. NHAI — historically the largest issuer — discontinued its 54EC bonds with effect from 1 April 2022; it briefly reopened the 2022-23 issue on 1 June 2022 before closing it for good on 3 September 2022, and is no longer an option.

Because the rate, lock-in and tax treatment are currently identical across all four issuers, there is little to separate them on substance. All carry AAA ratings and PSU backing. Choose on practical grounds: which tranche is open when you need it, the interest-payment date that suits you, and the minimum ticket size (IRFC's minimum is ₹20,000; the others start at ₹10,000).

The catch: a low rate and slab-rate tax on interest

Be clear-eyed about what you are buying. At 5.25% (the rate as of July 2026), fixed once you invest, the coupon sits below a typical bank fixed deposit and below what safe debt funds have paid recently. It will not rise if interest rates rise — you are locked to your entry coupon for the full term.

The interest is fully taxable as 'income from other sources' at your slab rate, with no special treatment. For resident investors the issuers do not deduct TDS on 54EC interest — so the tax will not already be paid for you, and you must self-report the interest in your ITR each year and pay it yourself. NRIs and other non-residents are different: TDS is deducted on their 54EC interest, subject to the applicable rate and any tax-treaty relief. 'No TDS' does not mean tax-free; for residents, forgetting to self-report is a common and avoidable mistake.

What you get is a tax exemption plus strong capital safety. The bonds are AAA-rated, PSU-issued and not market-linked, and they are redeemed at par after five years — so your money comes back subject to the issuer's AAA credit standing, not a government insurance guarantee. You are trading yield for a tax break and safety — not chasing returns.

• Your entry coupon (5.25% as of July 2026) is fixed for your term — no upside if rates rise, no liquidity if rates fall.
• Post-tax coupon is roughly 3.7% at the 30% slab, 4.2% at 20%, and 5.0% at 5%.
• Interest is taxed at your slab as income from other sources.
• No TDS for resident investors — you must declare the interest and pay the tax in your ITR yourself. NRIs/non-residents do have TDS deducted on 54EC interest.
• Capital is well protected (AAA, PSU-issued, not market-linked) and redeemed at par at maturity — secured by the issuer's credit, not government-insured.

Worked example: pay 12.5% LTCG now vs lock into 54EC

Property LTCG is now taxed at 12.5% without indexation for sales on or after 23 July 2024. If the property was acquired before 23 July 2024, resident individuals and HUFs (but not companies, firms/LLPs or non-residents) may instead compute the tax at 20% with indexation and pay the lower of the two computations. Both the 12.5% and the 20% rates are before surcharge and the 4% health and education cess. The example below uses the 12.5% flat rate.

Say you have a ₹50 lakh long-term gain and are in the 30% slab. You have two clean choices: pay the 12.5% LTCG tax and invest what is left wherever you like, or route the full ₹50 lakh into 54EC bonds tax-free and accept the 5-year lock-in at 5.25%.

The break-even is the key number. Your alternative investment must earn about 8.9% pre-tax (roughly 6.2% post-tax at the 30% slab) to match the 54EC route. Park the money in a 7% fixed deposit (about 4.9% post-tax) and 54EC wins by roughly ₹3.6 lakh over five years. But if your alternative is equity — taxed at only 12.5%, not your slab — the hurdle drops to about 7% pre-tax, which long-horizon equity usually clears, so paying the tax and investing wins.

Bottom line: 54EC works best when the tax saved is large and the money would otherwise sit in safe debt rather than equity, and when you can genuinely afford to lock ₹50 lakh away for five years. The decision turns less on your slab (the tax saved is a flat 12.5% either way) and more on the return you would otherwise earn.

How to buy 54EC bonds

54EC bonds are not listed and cannot be traded on the secondary market — you buy them directly from the issuer at the time of a fresh subscription. There are two routes.

Direct from the issuer: go to the REC, PFC, IRFC or HUDCO website, open the capital-gain-bonds / 54EC section, and fill the online application. You complete e-KYC with PAN and Aadhaar and pay by NEFT/RTGS/UPI, or by account-payee cheque or demand draft, into the issuer's designated collection account (held at banks such as SBI, HDFC Bank, ICICI Bank, Axis Bank, Canara Bank, IDBI, IndusInd or Yes Bank).

Through a bank or bond platform: many banks' securities arms and bond platforms (for example IndiaBonds, HDFC Securities, ICICI Direct) offer an online 54EC application that routes to the issuer. This can be more convenient, but the bond is still issued by the PSU — the platform is only the intermediary, so double-check you are subscribing to the genuine issuer tranche.

• Minimum: ₹10,000 (1 bond); IRFC's minimum is ₹20,000 (2 bonds). Face value ₹10,000 per bond.
• Documents: self-attested PAN and address proof, and one cancelled cheque; add demat details if holding electronically.
• Hold in your existing demat account (recommended) or as a physical certificate.
• Pay via NEFT/RTGS/UPI or account-payee cheque/DD to the issuer's collection account.
• Allotment and certificate/demat credit typically take about 4–8 weeks; interest is paid annually.
• Invest within 6 months of the sale to qualify for the exemption — the deadline is strict.

Should you use 54EC bonds?

54EC is one of two main ways to shelter property LTCG. The other is Section 54F (or Section 54), which exempts the gain if you reinvest the sale proceeds into a residential house. If you were going to buy a home anyway, 54/54F can shelter a far larger gain than 54EC's ₹50 lakh cap — so weigh that first.

Only ₹50 lakh of gain can go into 54EC. If your gain is larger, the excess is taxed at 12.5% regardless — 54EC does not scale. And once you commit, the money is locked for five years with no exit and no loan against it, so do not use money you may need.

Whichever route you take, run the exact numbers with a CA well before the six-month window closes. Miss the deadline and the exemption is gone for good.

• Consider 54EC if: your gain is up to ₹50 lakh, you don't want to buy property, you want capital safety, and you can lock the money for 5 years.
• Skip or supplement it if: your gain exceeds ₹50 lakh (the rest is taxed anyway), you'd rather invest post-tax money in equity for 5+ years, or you need liquidity.
• Compare with Section 54/54F (reinvest in a house) if buying a home is on the cards — it can shelter more.
• Always confirm the live coupon and current tranche on the issuer's site, and check the maths with a CA before the 6-month deadline.