How to Invest in Bonds in India - Motilal Oswal


Rural Electrification Corporation Ltd (REC)

Interest Rate% (60M)


Power Finance Corporation Ltd (PFC)

Interest Rate% (60M)


Indian Railway Finance Corporation Ltd (IRFC)

Interest Rate% (60M)




Capital bonds, also known as 54EC bonds, are debt instruments that give you a fixed return on your investment. If you sell a house property and earn capital gains thereon, you can enjoy tax exemption by investing in these bonds. When you invest in a capital bond, you get to earn interest at a fixed rate. The interest is calculated on the face value of the bond. And it is paid out at regular intervals. Once the bond matures, you will have to redeem the instrument.

Capital gain bonds are issued by REC (Rural Electrification Corporation Ltd), PFC (Power Finance Corporation Ltd) and NHAI (National Highways Authority of India) and IRFC (Indian Railways Finance Corporation Limited). They are not listed on any exchange. So, if you want to invest in capital bonds, you will have to buy them directly from the issuer - either in the physical form or in the demat form. You can invest up to Rs. 50 lakh in these bonds.

Non-convertible debentures (NCDs) are debt instruments that are generally issued by well-established companies. Through the public issue of NCDs, these companies aim to raise long-term capital. The interest rates on NCDs are relatively higher when compared to convertible debentures. However, unlike convertible debentures, NCDs cannot be converted into equity shares of the company.

NCDs, just like equity shares, are first issued by companies in the primary market and then traded freely in the secondary market, through exchanges like the NSE and the BSE. So, to invest in NCDs, you can subscribe to these instruments during the public issue, or you can buy them later in the secondary market.

Non-convertible debentures and bonds are both fixed income instruments. That said, there are some points of difference between bonds and NCDs. 1. Bonds can be issued by government entities, companies, or other financial institutions. But NCDs are issued by public companies only. 2. Also, while bonds are generally secured, NCDs can be either secured or unsecured. 3. Lastly, when a company undergoes liquidation, bond holders get priority over NCD holders.

Since these bonds grant tax exemption from the tax on long-term capital gains, you will need to make the investment within six months of selling your house property. Thereafter, the capital bonds lock-in period is 5 years from the date of investment.

The benefits of capital bonds include the following: 1.They offer tax benefits in the form of tax-exemption from long-term capital gains. 2. They offer a steady stream of income in the form of interest. 3. They help preserve your capital. NCDs also come with their own set of benefits, which include the following. 1. They offer higher returns to investors. 2. They are highly liquid. 3. They help diversify your investment portfolio.

If you have sold a capital asset and earned long-term capital gains, investing in 54EC bonds can help you enjoy tax-exemption on those gains. To claim these tax benefits, you will have to invest in the capital gain bonds within six months of transferring your capital asset.

As per the Income Tax Act, 1961, you can invest up to Rs. 50 lakh in total, in 54EC bonds. Your investments come with a lock-in period of 5 years.