54EC bonds: When people sell a house or land and make a profit, they often get worried about the big tax they have to pay. The tax on long-term capital gains can go up to 12.5%, and that can take away a big part of the money earned. To avoid this, many sellers choose to put their money into something called 54EC bonds, which are usually offered by NHAI or REC. These bonds are meant to help sellers save on tax, but according to tax expert Sujit Bangar, this may not always be the smartest idea.
Bangar explains that under the Income Tax Act, there are two main ways to save tax on long-term capital gains. One way is to reinvest the money in a residential house, which falls under Section 54 or 54F. The other option is to invest in 54EC bonds within six months of selling the property.
he said “You can save lakhs in capital gains tax using 2 options: Section 54/54F – Reinvest in a residential property. Section 54EC – Invest in notified bonds (NHAI/REC) within 6 months” reported India Today.
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How 54EC Bonds Work?
Bangar breaks down how 54EC bonds actually work. “Under Section 54EC, you can invest up to Rs 50 lakh from your LTCG into NHAI (National Highways Authority of India) or REC (Rural Electrification Corporation). But the investment must be done within 6 months of sale of land/building.” These bonds are only for gains made from selling long-term property. There are a few rules. “Must be from sale of long-term land/building. Lock-in: 5 years. Cannot pledge/sell before 5 years. Interest: Taxable. Max. investment limit: Rs 50 lakhs.”
So for example, if someone earns Rs 50 lakh as long-term capital gain, the tax to be paid would be Rs 6.5 lakh, which includes cess. To avoid paying this, the person can invest the full Rs 50 lakh into these bonds. But then the returns are quite low. Bangar explains, “BUT the return is just 5.25% (taxable), and money is locked in for 5 years.” This means the money will stay stuck for five years and the income earned from the interest will also be taxed.
Why some may Choose other Investment options?
If someone comes under the highest tax slab, the return from these bonds becomes even lower. After tax, the person may get just 3.745% as real return. Bangar points out that this isn’t very exciting.
He compares this with putting money in equity mutual funds for five years. “Now compare this with investing in an equity mutual fund for 5 years,” he says. “Returns = 12–14% CAGR. Post-tax (after 12.5% LTCG) = 10.5%–12.25%.”
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The difference in the final amount can be huge. According to Bangar, someone could earn Rs 9.6 lakh more in five years by choosing mutual funds instead of 54EC bonds. That’s a big amount to think about. Still, Bangar doesn’t say that 54EC bonds are bad for everyone.
He says, “If your priority is 100% tax savings, 54EC is safe.” But for those who don’t mind paying some tax and want to grow their money, investing smartly could give them better results. He adds, “But if you can afford to pay tax and invest wisely, you may walk away with Rs 9.6L+ more.”
He also shares one more idea for people who want both safety and growth. “A mix of arbitrage funds and equity funds may also be considered to balance stability and volatility.” In the end, he says it all depends on what each person wants. “Let your goals decide it.”
