54EC Bonds: The Hidden Cost of Dodging Capital Gains Tax—This ‘Safe’ Move Could Cost You Lakhs | Personal Finance News
New Delhi: If you just sold property and want to avoid the 12.5 percent long-term capital gains tax, Section 54EC bonds might look tempting. These government-backed bonds, available from REC, NHAI, PFC, and IRFC, let you invest up to Rs 50 lakh within six months of the sale and get a full exemption on your LTCG tax, which could otherwise cost you over Rs 6.5 lakh.
But this strategy has trade-offs that can quietly erode your wealth. The investment is locked in for five years: you cannot sell, pledge, or use the bonds as collateral during this period, or you lose the tax benefit. The interest rate is just 5.25 percent per year, and the interest is fully taxable as per your slab. For those in the highest tax bracket, your net return could drop to around 3.75 percent a year—barely outpacing savings or inflation.
Further, if your capital gain is more than Rs 50 lakh, only the invested amount is exempt and the rest is taxed. Since 2018, Section 54EC only applies to gains from sale of land or building held at least 24 months, not shares or mutual funds. Minimum investment is Rs 10,000 per bond, and there is no tax deducted at source, but you must declare the interest when filing returns.
These bonds are AAA-rated and considered safe, but are illiquid and may not suit those seeking higher returns or flexibility. You could also explore other exemptions like Section 54 (if you reinvest in residential property), which might offer better returns or more options, depending on your goals.
In short, while 54EC bonds can save you a lump sum in taxes, you might end up with far lower returns than if you paid the tax and reinvested elsewhere. Always calculate the real post-tax returns and factor in the lack of liquidity before locking in your money for five years.
