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Tax Free Bonds & Capital Gain Exemption Bonds

What is a tax-free bond?

  • A security issued by a company, financial institution or the government
  • Offers regular or fixed payment of interest in return for borrowed money for a specified period
Why are these bonds called “tax-free”?
  • You don’t have to pay any tax on the interest earned from these bonds (Income Tax Act, 1961)
Who provides tax-free bonds?
  • Government-backed entities
  • Public undertakings, such as IRFC, PFC, NHAI, HUDCO, REC, NTPC, NHPC, Indian Renewable Energy Development Agency (IREDA)
How do tax-free bonds work?
  • Tenure: You can invest for up to 10, 15, or 20 years – it’s your choice.
  • Liquidity: You can easily sell your bonds any time before maturity.
  • Safe investment option: You can be sure of receiving the promised regular interest.
  • Tax-exempted: You are not required to pay any taxes on the interest you earn.

54 EC capital gain bonds

54EC Bonds are one of the best ways to save long-term capital gains tax. A tax deduction is available under Section 54EC of the Income Tax Act. The maximum limit for such investments is Rs. 50,00,000. The eligible bonds under Section 54EC are REC (Rural Electrification Corporation Ltd), PFC (Power Finance Corporation Ltd) and NHAI (National Highways Authority of India).
Key features of 54 EC Bonds
– Safety and security: AAA rated.
– Interest: Taxable, although no TDS is deducted. Wealth tax is exempted
– Tenure- Lock-in period of 3 years and non- transferable.
– The minimum investment is 1 bond amounting to Rs. 10,000/- and the maximum investment is 500 bonds amounting to Rs 50 lakhs in a financial year
– The rate of Interest 5.25%, payable annually