The capital gains tax you pay depends on whether it’s short term or long term. Short term capital gains are added to your taxable income, and you have to pay income tax according to the different tax slabs. Long term capital gains attract 20% tax on the gains. Any property held for less than two years attracts short term capital gains tax (STCG) while property held over 2 years is eligible for long term capital gains tax (LTCG).

Now that this part has been explained and understood, let us move on to the heart of your question. If you want to save tax on proceeds from a property sale without investing in another one, the best way to do so is to purchase capital gains bonds under section 54EC. How does this help?

Under the Income Tax Act, section 54EC, capital gains invested in these bonds are exempt from the capital gains tax. If you invest the entire amount you got by selling a property, then you don’t have to pay any capital gains tax. 54EC bonds are specifically meant for investors earning LTCG and would like tax exemption on these gains.

The Capital gains bonds earn interest in the range of 5-6% and are highly secure with AAA rating. These bonds are sold through banks, and you can choose from bonds of NHAI or REC. They can be held in a physical form or demat. However, there are certain terms and conditions you need to fulfill if you opt for this route-

  1. You must invest the sum within 6 months of selling the property.
  2. It has a lock-in period of 5 years. At the end of 5 years, the redemption of these bonds is automatic.
  3. The minimum investment is Rs. 10,000 and the face value of each bond are Rs. 10,000.
  4. You cannot invest more than Rs 50 lakhs in capital gains.