What are 54 EC Bonds?
54 EC Bonds are popularly known for the tax benefits they provide under Section 54 EC of the Income Tax Act. These bonds are typically issued by the Power Finance Corp (PFC), Rural Electrification Company (REC), and the National Highways Authority of India (NHAI).
They have a tenor of 3 years. Currently, they offer 5.25% P.A. These bonds are non-transferable and are not traded on any exchanges. Investors may invest a minimum of Rs. 10,000. There is an investment ceiling of Rs. 50 Lakhs. The investments are considered safe, as they are AAA rated. The most attractive feature is that capital gains arising from the transfer of capital assets are exempt if invested in 54 EC Bonds.
Taxation of 54 EC Bonds
Benefits are available in the capital gains are invested within six months of being realized. The bonds must be held until maturity (i.e. locked in for a period of three years). The interest earned on the bonds is taxed per the income slab.
The table here illustrates the benefits for capital gains of Rs. 50 Lakhs for the 20% & 30% tax slabs.
These bonds are ideally suited for investors seeking to reduce their tax liability from capital gains. Those in the highest tax bracket will benefit the most.