What is Section 54EC of Income Tax Act? Exemption on Capital Gains

Written by : Knowledge Centre Team

2026-08-06

1146 Views

7 minutes read

Introducing BSE 500 Enhanced Value 50 Fund with Promise4Wealth

50 High-Potential Companies, One Smart Decision

Name is required Name should be Valid

Mobile Number is required Mobile Number should be Valid

Email is required Email should be Valid

DOB is required DOB should be Valid

Annual Income*

< 3 3-5 5-7 7-10 > 10

Annual Income is required

I agree that even if my contact number is registered with NDNC / NCPR, I would still want the Company to contact me on the given number and email id for the clarifications/product information sought by me and agree that I have read and understood the Privacy Policy and agree to abide by the same.

Please tick to proceed further.

Thank you for your interest in our product. Our financial expert will connect with you shortly to help you choose the best plan.

When you sell your long-term asset, like land or a building, you’re charged with a hefty capital gains tax. It reduces your profits by diminishing the value of your returns. But what if there was a smart, completely legal way to save that tax and grow your money at the same time?

Section 54EC of the Income Tax Act (now known as Section 85 of the Income Tax Act 2025) is a tax-saving gem designed for savvy investors who want to safeguard their real estate gains against massive long-term capital gains tax.

In this article, we’ll explore the power of capital gain bonds 54EC and walk you through how to claim a deduction under Section 85 (previously Section 54EC).

Key Takeaways

Section 85 of the IT Act 2025 (formerly Section 54EC of the IT Act 1961) lets you save long-term capital gains tax by reinvesting your capital in safe, government-backed bonds
You must invest the gains within 6 months of selling land or a building to claim the exemption
Up to ₹50 lakh can be invested per financial year, with a mandatory 5-year lock-in period
Interest earned on these bonds is taxable, but the principal investment helps you avoid capital gains tax

Ideal for those who want a tax-saving route without the hassle of buying real estate again

What is Section 85 (formerly Section 54EC) of the Income Tax Act?

Section 85 of the Income Tax Act 2025 is a special provision that helps you save on long-term capital gains tax if you reinvest your gains from a real estate sale in specific government-backed instruments called Capital Gain Bonds under Section 85 (previously Section 54EC). This means that you can reinvest your eligible long-term capital gains in specified government-backed bonds instead of paying tax on the gains immediately. If you meet the prescribed conditions, you can claim an exemption on the capital gains under Section 85.

Save Taxes While Building Long-Term Wealth

Full Name* Please enter correct name Please enter the Full name

Enter your mobile number* Please enter valid mobile number Please enter Mobile Number

Email* Please enter valid email Please enter Email

By submitting my details, I request the company to call me and override my NDNC/ NCPR registration and authorize the Company and its representatives, including its third-party vendors, to validate, evaluate and process this proposal and also to contact me via email, phone, WhatsApp or any other mode. I also provide my consent to share my IP address & location to the company for risk assessment. I confirm that, I have read and understood the Company’s Privacy Policy and agree to abide by it

...Read more Consent is required

How Does Section 85 of the Income Tax Act 2025 (formerly Section 54EC of the IT Act 1961) Work in Real Life?

To better understand how Section 85 of the Income Tax Act 2025 helps you save long-term capital gains tax, let's walk through a practical example that explains the process step by step:

Step 1: Sell a Long-Term Capital Asset: Suppose you sell a commercial property and earn ₹40 lakh in long-term capital gains. Since the gains arise from the sale of a long-term capital asset, they become eligible for exemption under Section 85, provided you satisfy the prescribed conditions.
Step 2: Invest in Specified Capital Gain Bonds: Instead of paying tax on the gains immediately, you invest the entire ₹40 lakh in specified Capital Gain Bonds within six months from the date of the property's transfer. These government-backed bonds are notified specifically for claiming tax exemption under Section 85.
Step 3: Claim the Exemption: As your investment complies with the conditions of Section 85, you become eligible to claim an exemption on the long-term capital gains. This reduces your capital gains tax liability while allowing your investment to remain secure in government-backed bonds.
Step 4: Preserve Your Wealth While Supporting Infrastructure: Rather than using a significant portion of your gains to pay taxes, you can retain more of your capital by investing in specified bonds. At the same time, your investment contributes to infrastructure and other public development projects funded through these government-notified instruments.

What are Capital Gain Bonds under Section 85 (previously Section 54EC of the IT Act, 1961)?

Capital Gain Bonds aren’t your usual stock market instruments. These are non-listed, government-backed investment tools that are issued only by select institutions, such as:

Rural Electrification Corporation (REC)
Power Finance Corporation (PFC)
Indian Railway Finance Corporation (IRFC)
National Highways Authority of India (NHAI)

They are issued primarily to fund large-scale infrastructure projects, such as highways, railways, and rural electrification.

Key Features of Capital Gains Bonds Under Section 85 of the IT Act 2025

Before investing, it's important to understand the key features of Capital Gain Bonds under Section 85. These features determine your investment eligibility, lock-in period, tax benefits, and overall returns:

Interest Rate: Around 5.25% per annum (subject to revision by issuing authorities)
Tenure: 5 years with a mandatory lock-in period
Minimum Investment: ₹10,000
Maximum Investment Limit: Up to ₹50 lakh in a financial year
Tax Treatment: Interest earned is fully taxable under "Income from Other Sources". However, the principal amount invested qualifies for exemption from long-term capital gains tax, subject to the conditions of Section 85 of the Income Tax Act 2025 (previously Section 54EC of the Income Tax Act 1961).

While Capital Gain Bonds may offer relatively lower returns than market-linked investments, they provide the dual benefit of tax exemption on eligible long-term capital gains and the security of investing in government-backed instruments.

Who is Eligible for a Deduction Under Section 85 (formerly Section 54EC)?

To avail the deduction under Section 85, certain conditions need to be satisfied. Let's look at who can claim this benefit and the requirements that must be met:

Capital Asset Sold: The section applies only to long-term capital gains from the sale of land or buildings (held for more than 24 months).
Time-Bound Investment: You must invest in specified capital gain bonds under Section 85 within 6 months from the date of sale.
Cap on Investment: You can invest up to ₹50 lakh per financial year. Even if your capital gains are higher, the exemption is limited.
Lock-in Period: The bonds are subject to a mandatory five-year lock-in period. If you transfer the bonds, convert them into money, or take a loan or advance against them before the lock-in period ends, the exemption claimed under Section 85 may be withdrawn, and the previously exempt capital gains may become taxable.

Why You Should Consider Section 85?

If you're selling a long-term asset like land or a building, Section 85 of the Income Tax Act 2025 might be the lifeline you need to save on capital gains tax. It’s designed for those who want to save on taxes without taking on high-risk investments or buying more property.

Let’s break down why this tax-saving route might be perfect for you.

Safety First: One of the most appealing features of Section 85 bonds (Section 54EC bonds) is that they are issued by government-backed institutions like NHAI, REC, and PFC. That means your money is parked in a relatively safe and secure investment, unlike the stock market or even real estate, where market-linked returns can be volatile.
No Real Estate Headaches: Unlike Section 86 of the Income Tax Act 2025 (formerly Section 54F of the Income Tax Act 1961), which requires you to reinvest in a residential property (along with the hassle of property hunting, registration, maintenance, etc.), Section 85 (Section 54EC) keeps things simple. There’s no need to buy another house, as you can just reinvest the gains in bonds, and you’re sorted.
Low Entry Barrier & Flexible Investment: You don’t need to have crores to get started. With a minimum investment of just ₹10,000, even small investors can take advantage of the tax benefits. And if your capital gain is significant, you can invest up to ₹50 lakh in a financial year, making it suitable for both modest and high-value transactions.
Suitable for High-Value Property Transactions: If you’ve recently sold a piece of ancestral land or inherited a property, the gains might be substantial, and so will the tax. Capital gains bonds under Section 85 offer a great way to protect your inheritance from tax erosion while ensuring that the funds continue to grow securely.

Did You Know?

The ₹50 lakh limit under Section 54EC applies per financial year, not per property sold. Plan your sale timing wisely

Source: Income Tax Department

$save tax with Term Plan$

What Things Should You Keep in Mind Before Investing in Section 85 Bonds?

While Section 85 offers a powerful tool for tax savings, it’s not without its trade-offs. Here are a few things to be cautious about before investing:

No Early Exit: Once you invest in Section 85 bonds (Section 54EC bonds), your money is locked in for 5 years. If you transfer the bonds, convert them into money, or take a loan or advance against them before the lock-in period ends, the exemption claimed under Section 85 may be withdrawn.
Interest Income is Taxable: Unlike tax-free bonds, the interest earned on these bonds is fully taxable under the head “Income from Other Sources.” While your principal gets exempted from capital gains tax, the annual interest (around 5.25%) will be added to your total taxable income.
Investment Cap May Restrict the Exemption: Although you can claim the exemption for eligible long-term capital gains, the amount that can be invested in specified Capital Gain Bonds is subject to the investment limit prescribed under Section 85. If your capital gains exceed the eligible investment amount, the remaining gains may still be taxable. Also, remember that each eligible property transfer has its own six-month investment window.

Where to Buy Section 85 Capital Gain Bonds?

Investing in Section 85 Capital Gain Bonds is a straightforward process, provided you apply through an authorised issuer or intermediary. Here are the common channels through which you can purchase these bonds:

Government-notified issuers: Direct issuers like the National Highways Authority of India (NHAI), Power Finance Corporation (PFC), Rural Electrification Corporation (REC), or Indian Railway Finance Corporation (IRFC) offer online applications through their official websites
Authorised banks and financial intermediaries: Certain authorised banks and financial institutions also facilitate investments in Section 85 Capital Gain Bonds. Depending on the issuer and intermediary, you may be able to complete the investment process through online or offline application modes, with some institutions also offering document collection or assisted application services.

Conclusion

Selling a property can leave you with a massive tax bill, but Section 85 of the Income Tax Act 2025 gives you an easy way out. By investing in capital gain bonds 85 (or capital gains bonds 54EC), you’re not just avoiding tax. But you’re putting your gains to work in ways that contribute to India’s infrastructure and help keep your wealth protected. Investing your gains in safe, government-backed infrastructure bonds within 6 months can legally reduce your capital gains tax to zero. Even though your money is locked in for 5 years and the interest is taxable, it is a stress-free route that protects your hard-earned profits without the hassle of buying another property.

So, the next time you plan to sell a property, remember this golden rule: Save tax. Support the nation. And grow safely, with Section 85 of the Income Tax Act 2025.

Glossary

Capital Gains Bonds: Government-issued bonds (like from NHAI, REC) that help taxpayers save capital gains tax under Section 54EC
Lock-in Period: A mandatory duration of 5 years during which 54EC bonds cannot be sold, transferred, or pledged
Long-Term Capital Gain (LTCG): Profit earned from the sale of land or building held for more than 24 months, taxable at 20%
Investment Cap: It is the maximum amount one can invest in 54EC bonds, which is ₹50 lakh per financial year
Financial Intermediaries: Commercial banks or brokerage firms, through which an investor can purchase infrastructure bonds

FAQs

It allows an exemption on long-term capital gains from land or buildings if invested in specified government bonds.

Bonds issued by NHAI, REC, PFC, and IRFC are eligible under this section.

You can invest up to ₹50 lakh in a financial year to claim the exemption.

The investment must be held for at least 5 years to retain the exemption.

No, the interest earned is taxable under the head "Income from Other Sources.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

Declare Income Sources In Itr Thum Desktop

Don’t Miss These Income Sources While Filing ITR

Tax Implications Of Surrendering Insurance Policy Thum Desktop

Can You Claim Tax Deduction if Life Insurance Premium Is Paid by Family?

Recent Blogs

Tax Savings - Top Selling Plans

We bring you a collection of popular Canara HSBC life insurance plans. Forget the dusty brochures and endless offline visits! Dive into the features of our top-selling online insurance plans and buy the one that meets your goals and requirements. You and your wallet will be thankful in the future as we brighten up your financial future with these plans.

Family Shield: Enhanced Protection

iSelect Smart360 Term Plan

3 Plan options
Life cover till 99 years
Steady income benefit
Block your premium at inception

Fixed Returns, Zero Risks & Worries

iSelect Guaranteed Future Plus

4 Plan options
Life cover + Guaranteed benefits
Accidental death benefit
Premium protection cover

Start Young, Pay Less, Stay Secured

Young Term Plan

Life cover till 99 years
Coverage for spouse
Block your premium rate
Covers 40 critical illness

What is Section 54EC of the Income Tax Act?

Introducing BSE 500 Enhanced Value 50 Fund with Promise4Wealth

Key Takeaways

What is Section 85 (formerly Section 54EC) of the Income Tax Act?

Save Taxes While Building Long-Term Wealth

Enter OTP

Application Status

Name

Date of Birth

Plan Name

Status

Unclaimed Amount of the Policyholder as on

Name of the policy holder

Policy No.

Address of the Policyholder as per records

Unclaimed Amount

Request Registered

How Does Section 85 of the Income Tax Act 2025 (formerly Section 54EC of the IT Act 1961) Work in Real Life?

What are Capital Gain Bonds under Section 85 (previously Section 54EC of the IT Act, 1961)?

Key Features of Capital Gains Bonds Under Section 85 of the IT Act 2025

Who is Eligible for a Deduction Under Section 85 (formerly Section 54EC)?

Why You Should Consider Section 85?

Did You Know?

What Things Should You Keep in Mind Before Investing in Section 85 Bonds?

Where to Buy Section 85 Capital Gain Bonds?

Conclusion

Glossary

FAQs

Recent Blogs

Don’t Miss These Income Sources While Filing ITR

ITR-5 Form: What it is, Eligibilty & How to File for AY 27-28

What is Income Tax in India? Know Income Taxation System

What is Tax Saving Fixed Deposit (FD)? Know the FD benefits & Rates in India

Income Tax on Family Pension: What You Should Know

Income Tax Calendar For India: Key Tax Filing Deadlines You Must Know

Section 80CCD (1B): Deductions Under Section 80CCD of Income Tax Act

Wealth Tax in India: Its Meaning and How Does It Works

Form 12BB: Know the Purpose & Components of Form 12BB

Tax Savings - Top Selling Plans

Family Shield: Enhanced Protection

Fixed Returns, Zero Risks & Worries

Start Young, Pay Less, Stay Secured

Popular Searches

Learn About Insurance

Insurance Plans

Tools and Calculators

Important Links

Customer Service

Distributors and Agents

About Us