Synopsis: Section bonds offer tax exemption on long-term capital gains from property sales—but at a steep cost. While you save over ?6.5 lakh in taxes, you may end up with poor returns, loss of liquidity, and a five-year lock-in trap.
Selling property often triggers a hefty 12.5% long-term capital gains (LTCG) tax—but many turn to Section bonds to escape this burden. These bonds, issued by government-backed entities like REC, NHAI, PFC, and IRFC, allow you to invest up to ?50 lakh within six months of selling your property and avoid paying LTCG tax.
Sounds like a smart move? Maybe not entirely.
The Tax Benefit
If you’ve made a ?50 lakh capital gain, investing the entire amount in these bonds could save you over ?6.5 lakh in taxes. That’s significant. However, the price of that tax exemption is a rigid five-year lock-in with limited returns.
The Catch: Poor Returns and Taxable Interest
bonds offer 5.25% interest, which is fully taxable. For someone in the highest tax bracket, the net return drops to around 3.75% annually—barely more than a savings account or inflation. And since you can’t sell, pledge, or use these bonds as collateral, your money is frozen for five years.
Not for Everyone
Another drawback: if your capital gain exceeds ?50 lakh, only the amount invested in bonds is exempt; the rest is taxed. Also, since 2018, bonds apply only to property held for more than 24 months—you can’t use them to avoid tax on gains from shares or mutual funds.
Minimum investment is ?10,000 per bond. There’s no TDS, but you must declare and pay tax on the interest when filing ITR.
Safer But Not Smarter?
These bonds are AAA-rated and secure, but illiquid. For those needing higher returns or flexibility, other exemptions—like Section 54 (reinvesting in residential property)—could be more suitable.
Final Takeaway
If your only goal is tax-saving, bonds work. But if you factor in real returns, lock-in limitations, and tax on interest, this “safe” investment could quietly cost you lakhs over five years. Consult a financial advisor and consider post-tax wealth, not just tax savings.
Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. Please consult a certified financial advisor before making investment decisions.
