Exemption of capital gains invested in specified long-term bonds

The provision

Section 54EC of the Income-tax Act, 1961, now section 85 of the Income-tax Act, 2025, lets any assessee (individual, Hindu undivided family, firm or company) avoid tax on a long-term capital gain from land or a building by investing the gain in specified long-term bonds. The bonds raise money for infrastructure, and the investor gives up liquidity for five years.

Conditions

1. Original asset: the gain must be a long-term capital gain from the transfer of land or building, or both (section 85(1)(a)). A gain on shares, gold or other assets, or a short-term gain, does not qualify.
2. New asset: the gain is invested in a long-term specified asset: a bond redeemable after five years, issued on or after 1 April 2018 by the National Highways Authority of India or the Rural Electrification Corporation Limited, or another bond notified by the Central Government (section 85(6)); bonds of the Power Finance Corporation and the Indian Railway Finance Corporation have been notified.
3. Time: the investment must be made within six months after the date of transfer (section 85(1)(b)). There is no deposit scheme for this exemption; the bonds themselves must be bought in time.
4. Limit: the investment that counts cannot exceed ₹50,00,000, whether in one tax year or spread over the year of transfer and the next tax year (section 85(2)).

Amount exempt (section 85(1))

• If the amount invested is equal to or more than the capital gain, the whole gain is exempt.
• If it is less, the gain is taxed only to the extent it exceeds the investment.
• So the exemption is the lower of the capital gain and the amount invested (within ₹50,00,000).

Withdrawal of the exemption

1. If the bonds are transferred or converted into money within five years of their acquisition, the gain exempted earlier is taxed as long-term capital gain of the year of that transfer or conversion (section 85(3)).
2. Taking a loan or advance on the security of the bonds counts as converting them into money on the date of the loan (section 85(4)).

Other points

1. The investment in the bonds cannot also be claimed as a deduction under section 123 (formerly section 80C) (section 85(5)).
2. Interest on the bonds is taxable as income from other sources; only the gain invested is exempt.
3. The exemption can be combined with others (for example section 82 or 86, the house exemptions) on the same gain, but the same rupee cannot be exempted twice.

Illustration (our own)

Ms. Iyer sells a plot held for six years on 10 June 2026 and has a long-term capital gain of ₹42,00,000. On 30 November 2026 she buys REC bonds for ₹30,00,000. The purchase is within six months, so ₹30,00,000 is exempt and ₹12,00,000 is taxable. If she sells the bonds in 2029, within five years, the ₹30,00,000 is taxed as long-term capital gain of that year.