Quick answer
Section 54EC capital gains bonds let you save long-term capital gains tax on the sale of land or a building by investing the gain, up to ₹50 lakh in a financial year, in notified bonds of REC, PFC, IRFC or HUDCO within six months of the sale. The bonds are locked in for five years and pay 5.25% interest a year, which is taxable.
What are Section 54EC capital gains bonds?
You sell a plot or a building and make a profit. If you held it for more than 24 months, that profit is a long-term capital gain. For property sold after 23 July 2024, the tax on that gain is 12.5%, with no indexation benefit.
Section 54EC bonds give you a way out of that tax bill without buying another house. You put the gain into specified bonds, and the amount you invest is not charged to tax as a capital gain. The bonds are issued by government-backed companies and are rated AAA, so the money itself is safe. The trade-off is time: your money is locked in for five years, and the interest is modest and taxable.
From 1 April 2026, the same relief sits in Section 85 of the Income-tax Act, 2025. The old name, Section 54EC of the 1961 Act, is still what most people search for, so this article uses both names. The rules did not change when the number changed.
Which gains qualify for 54EC bonds?
Only one kind of gain qualifies:
- A long-term capital gain from the transfer of land, a building, or both.
- The asset must have been held for more than 24 months.
- The gain must be invested within six months of the date of transfer. The clock runs from the sale date, not from the date you file your return.
Gains from shares, mutual funds, gold or crypto do not qualify, even if they are long-term. A short-term property gain does not qualify either. If your gain is from anything other than land or a building, 54EC bonds cannot save tax on it.
The key numbers, in one place
| Rule | What it is |
|---|---|
| Maximum investment | ₹50 lakh in a financial year (500 bonds of ₹10,000 each) |
| Minimum investment | ₹20,000 (2 bonds of ₹10,000 each) |
| Deadline to invest | Within 6 months of the sale |
| Lock-in period | 5 years — no sale, transfer or pledge |
| Interest rate | 5.25% a year, paid annually (REC Series XX, FY 2026-27) |
| Tax on interest | Added to your income, taxed at your slab rate; no TDS |
| Tax saved | 12.5% on the gain invested, plus 4% cess on that tax |
One point to check with your adviser: if your six-month window crosses 31 March into the next financial year, do not assume you can simply invest a second ₹50 lakh tranche for the same gain. The cap is applied per financial year, and how a split investment is treated is something to confirm case by case before you rely on it.
Which bonds are eligible under Section 54EC?
For FY 2026-27, four issuers have open series, all at 5.25% a year:
- REC Limited — Series XX, FY 2026-27, rated AAA by CRISIL, CARE, ICRA and India Ratings.
- Power Finance Corporation (PFC) — Series X, FY 2026-27.
- Indian Railway Finance Corporation (IRFC) — FY 2026-27 series.
- HUDCO — Series II, FY 2026-27.
NHAI is the exception. NHAI stopped accepting new 54EC bond applications in September 2022. If someone offers you a “new” NHAI 54EC bond today, check it carefully — existing NHAI holders keep their bonds till maturity, but no fresh NHAI money is being taken. In practice, most investors today choose between REC, PFC, IRFC and HUDCO, and since the terms are the same in substance, the choice usually comes down to which application route is easiest for you.
What changed, and what stayed the same
What changed: the section number. From 1 April 2026, for Tax Year 2026-27 onwards, the Income-tax Act, 2025 applies, and the 54EC relief appears as Section 85. Bond documents now cite Section 85 — the REC Series XX prospectus for FY 2026-27, for example, describes the bonds as carrying benefits under Section 85 of the Income-tax Act, 2025.
What stayed the same: everything that matters to an investor. The ₹50 lakh cap, the six-month window, the five-year lock-in, the land-or-building-only rule, and the taxable 5.25% interest are all unchanged. If you read an older guide that says “Section 54EC”, it is describing the same bonds you buy today.
How the tax saving works: a worked example
Say you sold a vacant plot on 10 January 2026:
- Sale price: ₹1.20 crore
- Cost of purchase: ₹80 lakh
- Expenses of transfer: ₹5 lakh
- Long-term capital gain: ₹1.20 crore − ₹80 lakh − ₹5 lakh = ₹35 lakh
Without any planning, tax at 12.5% on ₹35 lakh is ₹4,37,500, plus 4% cess — ₹4,55,000 in total.
Now invest the full ₹35 lakh in 54EC bonds before 10 July 2026, inside the six-month window. The invested ₹35 lakh is exempt, so the taxable gain becomes zero and no capital gains tax is payable on this sale.
The bonds then pay 5.25% a year: ₹1,83,750 a year on ₹35 lakh, or ₹9,18,750 over five years. That interest is added to your income each year. At a 30% slab, the tax on it is ₹55,125 a year, leaving ₹1,28,625 a year after tax — ₹6,43,125 over the five years. At a lower slab, you keep more of the interest. Either way, the tax saved on the gain (₹4,55,000 including cess) is separate from the interest, and it is saved in the year of the sale.
54EC vs Section 54 vs Section 54F: which one fits you?
| Route | What you must do | Cap | Lock-in |
|---|---|---|---|
| Section 54EC / Section 85 (bonds) | Invest the gain in notified bonds within 6 months | ₹50 lakh per financial year | 5 years |
| Section 54 / Section 82 (house) | Buy or build a residential house with the gain | Cost of the new house above ₹10 crore does not add to the exemption | House cannot be transferred within 3 years |
| Section 54F / Section 86 (house) | Invest the sale proceeds of a long-term asset (other than a house) in a house | No fixed rupee cap, but the whole proceeds must be invested for full exemption | House cannot be transferred within 3 years; you must not own more than one other house on the date of transfer |
In plain terms: pick bonds when you do not want to buy a house right now and your gain is ₹50 lakh or less. Pick Section 54 when you sold a house and are buying another one. Pick Section 54F when you sold something other than a house — a plot, for instance — and are buying a house with the proceeds. Our guides on Section 54 exemption on house sale, Section 54F exemption and capital gains on agricultural land and Section 54B explain the house routes in full, and the capital gains tax rates guide covers the 12.5% rate.
What happens if you sell 54EC bonds before 5 years?
The exemption is withdrawn. If you transfer the bonds, convert them into money, or pledge them as security for a loan within five years of allotment, the amount you had claimed as exempt is treated as a long-term capital gain in the year you break the lock-in. You then pay tax on it in that year.
This is the single biggest risk of the scheme, and it is a planning risk, not a market risk. Do not put money into these bonds if there is a real chance you will need it back before five years. A house purchase that falls through, a medical bill, a business need — none of these lets you take the money out early.
How to invest in 54EC bonds, step by step
- Confirm the gain qualifies. Land or building, held over 24 months, long-term gain.
- Work out the amount. The gain, up to ₹50 lakh for the financial year.
- Note the deadline. Six months from the date of transfer. Put it on your calendar on the day of the sale.
- Pick an issuer. REC, PFC, IRFC or HUDCO — check the current series on the issuer’s site before you apply.
- Apply with the sale proof. Keep the sale deed, the gain calculation and the bond allotment advice together.
- Report it in your return. Show the invested amount under the capital gains exemption schedule for Section 85 (shown as 54EC in older return forms).
- Declare the interest every year. It comes without TDS, so it is easy to miss — add it to your income yourself.
Who should use 54EC bonds, and who should skip them?
Good fit: you sold property, your gain is within ₹50 lakh, you do not plan to buy a house soon, and you can leave the money untouched for five years. Retired sellers and salaried sellers with a one-off plot sale are the typical case.
Skip them: you may need the money within five years; your gain is far above ₹50 lakh and a house purchase would shelter more of it; or your slab rate is very low, so the taxable 5.25% interest looks poor next to a tax-free option. In that last case, run the numbers both ways before you lock in.
Frequently asked questions
What is the maximum I can invest in 54EC bonds?
₹50 lakh in a financial year — 500 bonds of ₹10,000 each. Only the amount you actually invest is exempt, so if your gain is ₹30 lakh, investing ₹30 lakh shelters the whole gain, and investing more than the gain gives no extra benefit.
What is the lock-in period for 54EC bonds?
Five years from the deemed date of allotment. During that time you cannot sell, transfer or pledge the bonds, and there is no early redemption window.
Can I invest gains from shares or mutual funds in 54EC bonds?
No. Only long-term gains from land or a building qualify. Gains from shares, equity mutual funds, gold or other assets need different planning, such as the house routes under Section 54 and 54F.
Which bonds are eligible under Section 54EC?
Bonds notified by the Central Government for this purpose. For FY 2026-27, REC, PFC, IRFC and HUDCO have open series at 5.25% a year. NHAI stopped taking new applications in September 2022, so it is not an option for fresh money.
Is the interest on 54EC bonds taxable?
Yes. The 5.25% annual interest is added to your income and taxed at your slab rate. No TDS is deducted by the issuer, so you must report it yourself in your return each year.
What happens if I sell 54EC bonds before 5 years?
The exemption is withdrawn. The amount claimed as exempt is treated as a long-term capital gain in the year of the transfer or conversion, and tax becomes payable on it in that year.
Official sources
- Income Tax Department, e-filing portal: https://www.incometax.gov.in/
- Income Tax Department, official site: https://incometaxindia.gov.in/
- REC Limited, Capital Gain Tax Exemption Bonds Series XX (FY 2026-27) issue details: coupon 5.25% a year, face value ₹10,000, maximum application 500 bonds (₹50 lakh), benefits under Section 85 of the Income-tax Act, 2025.
Reviewed by Asuthod Rathod, CA
Last updated: 1 November 2026
Disclaimer: This article explains tax rules in simple language for general information only. Tax law changes often, and your case may differ. Check the official Income Tax portal or speak to a qualified professional before you invest or file.
Editorial byline for eircicai income tax guides — covering the Income Tax Act, 2025, section renumbering, regime comparison, and deductions. Content is reviewed by Asuthod Rathod, CA.