How IREDA Bonds Can Help You Save Capital Gains Tax On Property

In a big move that is expected to strengthen India’s renewable energy financing ecosystem, the Finance Ministry has decided to include IREDA’s (Indian Renewable Energy Development Agency Limited) bonds under Section 54EC, which makes IREDA only the sixth issuer in India whose bonds have become eligible as tax saving instruments.

In a press release dated July 10th, 2025, Central Board of Direct Taxes (CBDT), which falls under the Ministry of Finance, notified that bonds issued by IREDA will be classified as “long-term specified assets” and get an exemption under Section 54EC of the Income Tax Act. This would allow individual investors to claim tax exemption on capital gains earned from IREDA bonds redeemable after five years and issued on or after July 9, 2025.

So today, we are breaking down this IREDA recent development for you, and also explaining to you the concept of capital gains bonds and how you can save tax under Section 54EC.

First, What Is IREDA?

Indian Renewable Energy Development Agency Limited (IREDA) is a public sector company which was established as an NBFC in 1987. It is engaged in promoting, developing and extending financial assistance for setting up projects relating to new and renewable sources of energy and energy efficiency/conservation. IREDA falls under the administrative control of the Ministry of New and Renewable Energy (MNRE).

What Are 54EC Bonds?

Whenever a taxpayer sells a long-term immovable property¹, such as land or building, they can avail capital gains exemption under Section 54EC by investing the proceeds in certain bonds, which are known as 54EC bonds or capital gain bonds. These bonds provide tax exemption on any long-term capital gain arising from immovable assets², if the capital gain arising from such assets is invested in these bonds within 6 months. Apart from allowing individuals to save tax, these bonds enable the government to carry out developmental projects.

¹While Section 54EC broadly mentions a long term asset as a land or building or both, we can assume that 54EC also covers house property since Section 54 covers the latter.

²An immovable asset is an object that cannot be moved without destroying or altering it. It is fixed to the earth, such as a piece of land or a house.

What Is The Eligibility To Save Tax Through These Bonds?

To be eligible for exemption under Section 54EC, you, as a taxpayer, need to meet the following conditions:

• The asset being sold should be a ‘long term capital asset’, which includes land or building or both. The asset is considered long-term if the taxpayer has held it for a minimum of 24 months prior to the sale.

• The taxpayer must invest the capital gains within 6 months from the date of transfer.

• The investment should be made only in the five eligible issuers of 54EC bonds: NHAI, IREDA, REC, PFC and IRFC. (Details mentioned later in this blog)

• The total investment amount cannot exceed Rs 50 lakhs during the current financial year and the subsequent financial year to claim the tax saving.

• The taxpayer cannot sell, transfer, convert, or use the bonds as collateral for loans or advances for a period of 5 years from the date of acquisition.

Which Other Bonds Are Eligible For Tax Benefits Under Section 54EC?

With IREDA becoming the latest entrant in the list, the 54EC bonds can now be issued by the following companies, which are government-backed and AAA rated entities.

1. Indian Railway Finance Corporation Limited (IRFC Limited)

2. Indian Renewable Energy Development Agency Limited (IREDA Limited)

3. Rural Electrification Corporation Limited (REC Limited)

4. Power Finance Corporation Limited (PFC Limited)

5. Housing and Urban Development Corporation (HUDCO Limited)

6. National Highway Authority of India Limited (NHAI Limited)

How Much Tax Can You Save From IREDA Bonds?

Technically, you can save up to Rs 6.25 lakhs in LTCG (Long Term Capital Gains) tax by investing Rs. 50 lakhs in 54EC bonds. Given that the maximum investment allowed in 54EC bonds is Rs 50 lakhs in every financial year, the maximum LTCG tax that you can save by in 54EC bonds turns out to be (Rs 50 lakhs x 12.5% LTCG tax= Rs 6.25 lakhs), which in itself, is a lot of money saved, right?

But keep in mind that regardless of how big your actual capital gains amount is, such as Rs 80 lakhs or Rs 1 crore, you can only claim exemption on the amount actually invested in these bonds, up to Rs 50 lakhs in a year. So, in case your capital gains exceed Rs 50 lakh, only the Rs 50 lakh which is eligible to be invested in 54EC bonds is exempted from LTCG tax, the rest of the capital gains will be taxable as per applicable rules.

Example Of How 54EC Bonds Help You Save Tax

For example, you purchased a piece of land for Rs 2 crores in 2020. Now five years later, you have sold that land for Rs 2.5 crores, thus earning a handsome Rs 50 Lakhs gain. Now you can either pay taxes on this Rs 50 lakhs capital gain at 12.5% interest rate (without any indexation benefits), or you can invest this amount in 54EC bonds and earn anywhere between 5% - 5.75% interest p.a., with the highest safety through AAA-rated govt backed bonds.

Also, it's worth noting that in the Interim Budget 2024, the Finance Ministry had removed the indexation benefit and reduced the LTCG rate from 20% to 12.5%. The new provisions for taxation of capital gains were effective from 23.07.2024 and had become applicable to any sale/transfer made on or after 23.07.2024. Moreover, the government gave the choice of either opting for the old rule of 20% LTCG tax with indexation, or the new rule of 12.5% LTCG tax but without indexation to those who had acquired their property before July 23, 2024.

Pros Of 54EC Bonds

• Enables you to save upto Rs 6.25 lakhs on LTCG tax - Investing Rs 50 lakhs in 54EC bonds after selling an immovable property can help you save upto Rs 6.25 lakhs (12.5%) on long-term capital gains tax.

• You get access to highest credit rating govt bonds -These bonds are AAA-rated by independent credit rating agencies, and the issuers are public sector undertakings backed by the government.

• No TDS deduction - While interest received from 54EC bonds is taxable, no TDS is deducted on these interest payments, so you have more money to reinvest or utilize until you pay the tax.

• NRIs are also eligible to invest - While NRIs are still not allowed to invest in some investment instruments in India, like PPF, NSC, etc, fortunately 54EC is not one of them. If you sell a property and have NRI status, you can still invest in 54EC bonds.

Cons Of 54EC Bonds

• Lack of liquidity due to five year lock-in - Your investment in these capital gains bonds can be redeemed only after 5 years of lock-in, which can become a liquidity restriction for investors who wish to have a shorter horizon. Also note that before April 2018, these bonds could be redeemed within 3 years, but later the rule was changed by the FInance Ministry.

• You cannot claim capital gains exemption on all assets: The exemption from capital gains by investing in 54EC is only available if these are long term gains from sale of land/property. You cannot invest the gains of other other investments like equities/mutual funds and then invest in these bonds to get an exemption.

Conclusion

In conclusion, the inclusion of IREDA bonds under Section 54EC marks a significant advancement in India's renewable energy financing landscape. This move not only provides investors with an opportunity to save on long-term capital gains tax but also supports the growth of the renewable energy sector by offering a lower cost of funds. While these bonds offer tax benefits and are backed by government entities, investors should also consider the relatively lower returns and the five-year lock-in period. Overall, IREDA bonds present a strategic investment option for those looking to contribute to sustainable energy development while benefiting from tax exemptions. You can also consider investing in other 54EC bonds if you are interested in this segment.

Please note that this is an opinion blog and not an official research or investment advice*.* This blog is for educational purposes only, and neither encourages nor discourages you from investing in any particular bond, platform or asset class.