PFC’s capital gains tax bonds help you save on taxes from real estate

The Section 54EC exempts maximum of Rs 50 lakh arising from the transfer of a long-term capital asset

Priyanka Bharati Jan 23, 2019

Capital gains taxIn India, real estate as an asset class has been historically favoured for investing. Purchasing a property and then selling it at a higher price is a common practice. Tax liability on such capital gains in the case of short term holding – currently less than two years – would be as per income tax slab. Long term capital gains tax of 20% with indexation is applicable for holding period of over two years (before last 2018 budget the holding period was three years).

However, there are provisions in the Income Tax act to reduce the tax liability. If capital gains from the sale of a house are invested in another residential property (with the condition that the owner has only one house) they are exempted from tax under section 54F of the Income Tax Act. However, there is also another option to save tax – under section 54EC – by investing these gains in capital gains tax exemption bonds with an upper limit of Rs 50 lakh.

Power Finance Corporation (PFC) has an ongoing issue – PFC Capital Gain Tax Exemption Bonds –Series II – aimed to tap such investors. PFC received government’s approval in 2017 to raise funds through capital gain bonds under section 54EC of the Income Tax Act. The current issue is the second issue floated by PFC which will be open for subscription till 31st March 2019. This bond carries highest domestic credit ratings of ‘AAA’ from CRISIL, ICRA and CARE. It has a lock-in period of five years (this was three years earlier which was amended in last budget to five years), and during this period it offers investors coupon rate of 5.75% p.a.

Investors can invest minimum of Rs 20,000 up to a maximum of Rs 50 lakh. The Section 54EC exempts maximum of Rs 50 lakh arising from the transfer of a long-term capital asset (applicable only on long term capital gains from real estate and not from any other capital asset after the amendment in last budget) if the amount is invested whole or any in parts in specified bonds like capital gains tax exemption bonds within a period of six months.

Earlier, these bonds were issued by only National Highways Authority of India and Rural Electrification Corporation (REC), which were allowed to issue these bonds. Later section 54EC of the IT Act was modified to include any other bond notified by the Central Government thus permitting PFC to issue these bonds.

Highlights of the Issue

Security Name PFC Capital Gain Tax Exemption Bonds –Series II
Rating ‘AAA/Stable’ by CRISIL, ‘AAA’ by ICRA, &’AAA’ by CARE
Issue size Rs 500 crore + Green Shoe option to retain oversubscription
Face Value Rs. 10,000 (Rupees Ten Thousand only) per bond
Issue Price At par (Rs. 10,000/- per bond)
Coupon Rate 5.75% p.a
Issue Opening & Closing Date Issue Opening Date: April 1, 2018 Issue
Closing Date: March 31, 2019 (at the close of the banking hours) or at a date / time as may be decided by PFC in its absolute discretion
Minimum application size and in multiple of thereafter Application must be for a minimum size of Rs. 20,000/- (2 bonds) and then in multiple of Rs. 10,000/- (1 bond) thereafter
Maximum application size 500 bonds of Rs. 10,000/- each (Rs. 50,00,000/-)
Mode of Issue Private placement basis
Mode of Subscription Applicants may make remittance of application money through electronic mode or cheque / draft drawn in favour of ‘PFC Capital Gain Bonds’.
Deemed Date of allotment Last day of each month in which the subscription money is received and credited to PFC Capital Gain Collection Account
Coupon payment date Every year on 31st July till redemption and balance along with redemption
Tenor 5 years from the deemed date of allotment
Date of Redemption At the end of 5 years from the Deemed Date of Allotment
Transferability Non-transferable, Non-Marketable, Non-negotiable and cannot be offered as a security for any loan or advance
Listing The Bonds will not be listed on any stock exchange due to non-transferability during the tenure of Bonds
Trustees Beacon Trusteeship Limited
Bankers to Issue HDFC Bank Ltd., IndusInd Bank Ltd., Yes Bank Ltd., ICICI Bank Ltd. and Kotak Mahindra Bank Ltd. (For Designated Branches please visit our website:

RupeeIQ take: These bonds are safe as they are guaranteed by the government of India, PFC being a central public sector undertaking, and a Navratna company. The capital raised through these bonds will be used for financing power sector. There will not be any delay in coupon payments nor in the principal repayment. This bond is suitable for investors who have long term capital gains from selling a real estate property. One way to save on taxes is to invest in another property (as long as the owner does not have more than two houses including the new one), and the other way is to invest in Section 54 EC bonds issued by companies like PFC, or REC and NHAI. Remember that PFC’s interest rate is only 5.75% and the lock-in is five years. Also investors need to pay tax on the interest they earn. You could also look at REC’s Section 54 EC bonds which offers same interest rate as another option.

Priyanka Bharati

Priyanka Bharati is a senior personal finance analyst with RupeeIQ. She can be reached on [email protected]

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