Summary: REC bonds are Section 85 instruments that allow property sellers to redirect long-term capital gains into government-backed bonds, reducing their LTCG tax liability. This guide explains how REC bonds work, their interest rate, lock-in conditions, tax treatment, and what to evaluate before investing.
Quick Overview
- REC bonds are issued by REC Limited, a Maharatna PSU under the Ministry of Power.
- REC bonds can reduce long-term capital gains tax liability under Section 85 of the Income Tax Act 2025, subject to eligibility conditions.
- REC bonds are non-transferable and non-tradable.
- REC bonds provide a mechanism to reduce immediate tax outflow after the sale of immovable property.
When you sell a property, the transaction does not end with receiving the sale proceeds. A portion of your gains may still go toward long-term capital gains tax before you can reinvest the money elsewhere. However, Indian tax law also provides a route that allows you to preserve more of that capital while earning regular returns through government-backed infrastructure bonds. In exchange, you accept a fixed lock-in period and lower liquidity.
This guide explains what REC bonds are, their features, why they remain relevant in 2026, and how to invest in them.
What are REC bonds?
REC Limited is a Maharatna Public Sector Undertaking (PSU) under the Ministry of Power. It finances rural electrification, power distribution infrastructure, and renewable energy projects across India. The bonds it issues fall under Section 85 of the Income Tax Act 2025, also formerly known as Section 54EC of the Income Tax Act 1961. If you sell a land or a building or both, and realize a long-term capital gain, you can invest the proceeds in these bonds within six months of the sale and claim an exemption from LTCG tax.
That makes REC bonds a capital gain instrument first. The annual interest income is secondary to the tax benefit that forms the core economic rationale.
Interest is generally paid annually at 5.25% per annum, credited directly to your registered bank account on June 30 each year. At maturity, the principal is redeemed automatically and credited to the registered bank account. No separate redemption application is needed if account details remain current. If you prefer a passive fixed-income structure that does not require active monitoring, that simplicity may be relevant.
Section 85 allows issuers like REC, NHAI, PFC, IRFC, HUDCO, and StockHolding to issue similarly structured bonds. You should also note that Section 85 of the Income Tax Act 2025 replaced Section 54EC of the Income Tax Act 1961, effective April 1, 2026. Many investors still refer to these as 54EC bonds out of familiarity.
Key Features of REC Bonds
REC bonds serve one specific purpose: they let you redirect capital gains into a government-backed instrument and get an exemption on their LTCG tax liability. Every feature below flows from that single purpose.
Tax Exemption Under Section 85
Property held for more than 24 months qualifies as a long-term capital asset under Indian tax law. For properties sold on or after July 23, 2024, LTCG is generally taxed at 12.5% without indexation. However, resident individuals and HUFs selling property acquired before July 23, 2024, may choose between 12.5% without indexation or 20% with indexation, whichever is more beneficial.
Reinvesting your capital gains by investing into Section 85bonds within six months of the sale provides a legal route to eliminate or reduce this tax liability. The exemption covers only the amount invested, not the full sale proceeds. If your capital gains exceed Rs. 50 lakh, only investments up to ₹50 lakh qualify for exemption in a financial year. Any remaining uninvested gains continue to remain taxable as long-term capital gains at the applicable rate, currently 12.5% without indexation in most cases.
One point worth noting: the exemption applies only to gains from immovable property such as land, buildings, or both. Gains from financial assets like equity shares or mutual funds do not qualify.
Interest Rate
REC bonds currently pay 5.25% per annum(as of 28th May,2026), credited annually. Interest is deposited directly into your registered bank account every June 30. This coupon rate remains largely unchanged because the primary benefit of these bonds is the capital gains tax exemption.
Lock-in Period
REC capital gain bonds carry a mandatory five-year lock-in from the date of investment. No premature withdrawal, transfer, or pledging is permitted during this period. This is a firm condition tied to the tax exemption.
If the bonds are redeemed or transferred before maturity, the exempted capital gains become taxable in the year of transfer as long-term capital gains. The tax benefit unwinds entirely.
Investment Timeline
The six-month window starts from the day the capital asset transfers, which is the sale date, not the registration date or payment receipt date. Missing this deadline means losing eligibility for the exemption. There is no extension provision.
Processing timelines are relevant because allotment may take 15 to 30 days, and applications submitted close to the six-month deadline may risk missing the eligibility window if delays occur.
Investment Limits
The minimum investment for buying one unit of this bond is ₹10,000. The upper ceiling is 500 units of bonds, worth ₹50 lakh per financial year. That ceiling applies across all eligible issuers combined: REC, PFC, IRFC, and others. You can also split the allowed amount into different Section 85 bonds. For example, splitting ₹25 lakh into REC and ₹25 lakh into PFC will still count as ₹50 lakh against the same ceiling.
The ₹50 lakh limit is per financial year. If you sell a property in March 2026 (FY 2025-26), you have six months to invest (until September 2026). The investment can fall in FY 2025-26 or FY 2026-27 within that six-month window, but the ₹50 lakh cap applies to the financial year in which the investment is made. Two sales in the same financial year share one ₹50 lakh cap. Two sales in different financial years each get their own ₹50 lakh cap.
Taxation of Interest
The capital gains exemption and the interest taxation operate separately. Interest income from the bonds is taxable, though no TDS is deducted. It gets added to your total income and taxed at the applicable slab rate.
Credit Quality and Issuer Standing
REC Limited was granted Maharatna CPSE status in September 2022, the highest classification the Government of India assigns to public sector enterprises. REC operates under the Ministry of Power and has served as a nodal agency for flagship government schemes, including Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagya).
The bonds carry AAA ratings from CRISIL, ICRA, and CARE. For the purpose of credit risk evaluation, the combination of PSU institutional backing, Maharatna status, and AAA ratings from three agencies supports a relatively strong credit profile compared with many corporate issuers.
Why Investors Still Choose REC Bonds in 2026
While the coupon rate of REC bonds is lower, they offer a different set of features to property sellers.
Here is an illustrative example. Suppose you sell a residential flat in 2026 and earn a long-term capital gain of ₹20 lakh. If you do not reinvest, you may have to pay 12.5% LTCG tax (plus applicable surcharge and cess), which works out to approximately ₹2.5 lakh. Your net proceeds would reduce to approximately ₹17.5 lakh.
Alternatively, if you invest ₹20 lakh in REC bonds within six months, you can claim exemption under Section 85 on that amount and exempt the ₹2.5 lakh tax outflow.
You also earn interest at 5.25% per annum on the invested amount:
Annual interest on ₹20 lakh: ₹1.05 lakh
Total over five years: ₹5.25 lakh (before tax)
Interest is taxable at your applicable slab rate. However, the full ₹20 lakh principal is preserved for the five-year holding period, and the tax outflow is exempted.
For comparison, if you had invested the same post-tax amount of ₹17.5 lakh in a 7% fixed deposit, you would have earned approximately ₹6.12 lakh in interest over five years, but starting with ₹2.5 lakh less capital.
In this illustration, the capital preserved through the Section 85 exemption represents a different kind of benefit.. The structure includes a mandatory five-year lock-in with no early exit option.
The coupon structure aligns with the policy-oriented design of the instrument as a policy-driven tax tool rather than a market-competitive yield product. Most Section 85 issuers operate within a narrow rate band for the same reason.
The government sets the rate for policy instruments like these to balance investor incentive with the cost of capital for infrastructure financing. The structure prioritizes tax treatment over yield competitiveness. It is designed to make the product sufficiently attractive to draw capital into government priority areas such as power and infrastructure financing, while offering tax relief in return.
What Investors Should Know Before Investing in REC Bonds
REC bonds efficiently reduce immediate tax outflow after a property sale. But they do not account for liquidity, reinvestment flexibility, or inflation protection. Here are some structural trade-offs associated with the product:
- Illiquidity: Once you make the investment, there is no secondary market sale, no transfer, and no early redemption. Property sales can create a temporary feeling of surplus, with large proceeds sitting in a bank account. Over a five-year holding period, your liquidity needs or financial situation may change in ways that make locked capital feel different from when you first invested.
- Reinvestment rigidity: The 5.25% coupon is fixed for the entire tenure. If market rates rise meaningfully, as Indian rate cycles have demonstrated over five-year windows, you cannot reposition this capital into higher-yield opportunities without forfeiting the Section 85 tax benefits entirely.
- Inflation erosion: The 5.25% coupon does not beat inflation in most economic conditions. REC bonds are not designed to grow purchasing power.
You may allocate only a portion of eligible gains to REC bonds while deploying the remainder differently. Liquidity profile, fixed-income allocation, and income planning considerations can affect how the structure is evaluated.
How to Invest in REC Bonds in 2026
REC bonds are available year-round on a tap basis rather than through limited public issues. Eligibility for the exemption depends on investing within six months of the property sale.
Online Purchase of REC Bonds
REC bonds can be directly purchased from the REC portal or using the Sugam REC mobile app. All investment services, such as purchasing bonds and downloading bond certificates, can be completed online. Complete digital KYC by submitting your PAN, Aadhaar, and other required documents. The bonds can be credited directly to a demat account.
Offline Purchase of REC Bonds
To buy REC bonds offline, download the application form, attach self-attested KYC documents and a PAN copy, draw a cheque or demand draft in favor of REC Limited, and submit it through a designated collecting bank.
Conclusion
REC bonds are designed for a specific scenario: to gain tax exemption for a property sale that generates a taxable long-term capital gain. They are not designed to maximize yield.
The combination of PSU institutional backing, Maharatna status, AAA credit quality, and a structured tax exemption mechanism keeps REC bonds relevant across property-sale cycles, rate environments, and evolving tax frameworks. The coupon has remained largely unchanged, and the structure has been consistent since its inception under Section 54EC.
