What happens if I redeem before 5 years?

Premature redemption is not permitted. If you exit by selling the bond or pledging it, the original exemption is reversed and the capital gain becomes taxable in the year of breach.

Educational guide

Capital Gains Bonds (Section 54EC) — REC, PFC, IRFC

Section 54EC bonds let you park up to ₹50 lakh of long-term capital gains from property and claim a complete tax exemption — locked in for five years.

// eligible issuers

Three PSU bond issuers qualify: Rural Electrification Corporation (REC), Power Finance Corporation (PFC) and Indian Railway Finance Corporation (IRFC). All carry AAA credit rating and sovereign-equivalent safety.

// key conditions

Investment must be made within 6 months of the property transfer. The maximum investment qualifying for exemption is ₹50 lakh per financial year across all 54EC issuers combined. Bonds carry a 5-year lock-in (extended from 3 years in 2018) and currently pay 5.25% p.a. interest.

// tax treatment of the interest

Interest received on 54EC bonds is fully taxable at slab rate as 'Income from Other Sources'. TDS is not deducted by the issuer. Only the original capital gain becomes exempt — the interest is regular income.

// frequently asked questions

You can buy bonds for more, but only ₹50 lakh qualifies for capital gains exemption. Spreading the investment across two financial years (e.g. ₹50 lakh in March and ₹50 lakh in April) can capture ₹1 crore of exemption — but the 6-month window must still hold.