Strengthen the bond between you and your wealth

What is a tax-free bond?

  •  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.
  •  Demat account is optional:You can hold these bonds in physical form, too.

Let’s look at an example to understand this better.

Amount invested
(10 Years)
Rate of interest
per year
Total amount of interest per yearInterest received
Rs.1,00,0007.5%Rs. 7,500Rs. 7,500

Though the interest received from these bonds is non-taxable, any profits derived by selling these bonds in the secondary market are liable to taxes.

Who is eligible to invest in tax-free bonds?

  •  Retail Individual Investors (RIIs) – Including members of Hindu undivided family (HUF) and Non-Resident Indians (NRIs).
  •  High Net-worth Individuals (HNIs) – who have a low-risk appetite and can invest up to Rs. 10 lakhs.
  •  Qualified Institutional Buyers (QIBs) – who have been defined under the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000.
  •  Corporate, trusts, co-operative banks, regional rural banks

How does one invest in tax-free bonds?

  •  You can avail these bonds in physical form as well as in Demat mode.
  •  If you are investing in tax-free bonds during the public issue, you have the option to apply online as well as offline for it.
  •  If you are investing in tax-free bonds after the public issue, you can invest via your trading account, just like you invest in shares.

Note: Currently, there is no tax-free bond issue in the primary market. If anyone interested can invest through the secondary market.

Why invest in tax-free bonds?

  •  Tax-free income
  •  Low risk
  •  Easy liquidity
  •  Demat optional
  •  Ratings by various agencies available

Capital Gain Bonds :

Long-term capital gain is the gain that is derived out of a sale of an asset that has been held for more than a year. You can invest the gain in certain specified bonds to claim tax exemption within 6 months of the date of sale of the asset. Save tax on long-term capital gains by investing in 54EC bonds such as REC capital gain bonds, NHAI capital gain bonds respectively. Budget 2018 has proposed to amend the 54EC section of the Income Tax Act wherein capital gains arising only from the sale of assets such as land or building or both will be considered for tax exemption. It has also proposed to increase the lock-in period to 5 years from 3 years. This amendment will take effect from 1st April 2019.

Key Features of Capital Gain Bonds specified under Section 54EC:

1. Non transferable and non negotiable bonds
2. No TDS but interest earned is taxed
3. AAA credit rating by ICRA, CRISIL and India Ratings and Research Private Limited
4. Maximum investment is Rs. 50 lakh
5. Maximum of 500 bonds can be bought at Rs. 10000 per bond
6. Annual interest rate at 5.75%
7. Tenure of the bond is 5 years
8. Available in Physical as well as demat form

The Analysis

According to section 54EC of I.T., any person (individuals, HUFs, partnership firms, companies etc.) can avail exemption in respect of long-term capital gains (arising from the sale of a long-term capital asset other than equity shares and securities), if the capital gain is invested in Capital Gain bonds. The exemption will be the amount of capital gain or the amount of investment made, whichever is less.
The interest rate offered on these bonds is 5.75% per annum. The exemption is subject to:

  •  The investment is made within a period of 6 months from the date of transfer of the asset
  •  Lock-in period to 5 years from 3 years. This amendment will take effect from 1st April 2019
  •  Bonds sold, transferred or converted into money or any loan or advance taken on the security of such bond within a period of 3 years from the date of acquisition, the capital gains earlier exempt are taxable in the year of sale or transfer of the bonds
  •  Maximum investment limit of up to Rs. 50 Lakhs in a Financial Year per individual.
  •  If the amount invested in bonds is less than the capital gains realized, only proportionate capital gains would be exempt from tax.

Those who wish to save taxes on LTCG can invest the amount in the capital gains bonds within six months from the date of arising profit. By investing in 54 ec Capital gain bond one can save up to Rs 50 Lakh in a single financial year. These instruments are not only capital protected instruments, but they also provide a steady stream of income to you. At Karvy, you can invest in Capital Gain Bonds.

Bond offered (under sec 54 EC):

REC Long-term bond

Rate of Interest : 5.75% pa (effective – April 02, 2018)


The tenure of the Bonds will be 60 Months and Bonds will be automatically matured at the end of the period, from the deemed date of allotment.

Power Finance Corporation (PFC)

Rate of Interest : 5.75% pa

TAX Exemption under Section 54 EC:

1. Section 54 EC bonds can be used to save tax only when the capital gain is derived from land or building or both.
2. It cannot be used to save tax on capital gain arising from the sale of non-equity mutual funds, debentures, gold jewelry or gold ETFs.
3. The maximum investment in these bonds is Rs. 50 lakh only. As the property prices have soared high, this provision does not provide adequate relief for the investor.