Introduction
The widely known 54EC Capital Gain Bonds have now been reintroduced as Section 85 Capital Gain Tax Exemption Bonds under the new Income Tax Act.
This change in the Income Tax Act is a part of a broader effort to streamline tax provisions and enhance clarity. However, it’s important to note that only the name has changed—everything else, including tax benefits, investment limits, and lock-in period, remains the same.
In this blog, we break down this update and explain how Section 85 bonds continue to be a powerful and reliable tool for saving long-term capital gains tax.
Why the Shift from 54EC to Section 85?
The renaming from Section 54EC to Section 85 reflects:
- Tax laws have been streamlined
- Categorization of long-term capital gains has been made clearer
- Financial regulations have been updated to reflect these changes
However, the core benefit remains the same — saving tax on long-term capital gains.
Key Features of Section 85 Bonds
1. Tax Exemption Benefit:
You can receive full exemption of LTCG by investing in these investments in the specified time period.
2. Investment Limit:
- Minimum Investment – Rs.20,000
- Maximum Investment – Rs.50 Lakhs in a financial year
3. Lock-in Period:
You cannot withdraw from your investment for a period of 5 years from the date you make your investment.
4. Interest Rate:
Typically around 5.25% per annum payable annually.
5. Safety:
Government-backed low-risk investments.
Eligible Bonds Under Section 85
Bonds that are issued by government-approved entities, such as:
NHAI (National Highways Authority of India)
REC (Rural Electrification Corporation)
PFC (Power Finance Corporation)
IRFC (Indian Railway Finance Corporation)
These entities provide backing, security and guarantee good returns on your investments.
Section 85 vs Other Tax Saving Options
| Feature |
Section 85 Bonds |
Real Estate Reinvestment |
Equity |
| Risk |
Low |
Medium |
High |
| Lock-in |
5 years |
Variable |
None |
| Return |
Fixed |
Moderate |
High |
| Tax Benefit |
Yes |
Yes |
Limited |
Conclusion
The evolution of the bond from Section 54EC Capital Gain Bonds to Section 85 Capital Gain Tax Exemption represents an evolution rather than simply only a difference in purpose.
Regardless, these bonds remain one of the safest and most effective methods of capital gains tax avoidance in India.
If you plan on selling real estate and/or intend to realize a profit by selling your long-term assets, then including Section 85 bonds into your financial planning will help you develop a good strategy to achieve tax efficiency.
Frequently Asked Questions (FAQs)
Section 85 Capital Gain Bonds are government-backed bonds that provide exemption on long-term capital gains when invested within 6 months of asset sale.
Yes, Section 85 is the new name for 54EC Capital Gain Bonds. The features, benefits, and tax exemptions remain the same.
You can invest up to ₹50 lakh in a financial year to claim tax exemption under Section 85.
Section 85 bonds have a mandatory lock-in period of 5 years, during which withdrawal is not allowed.
Any individual or entity earning long-term capital gains from the sale of assets like property can invest in these bonds.