Capital Gains Bond Versus Mutual Fund: Which Works Better for You?

MFs may outperform 54EC bonds, but the right choice depends on your risk appetite, goals and liquidity needs

- Anil Poste

When you sell assets and make substantial capital gains, your instinct is to minimize the taxes you pay. One instrument that can help with this is a capital gains bond, also known as 54EC bond, which offers a tax exemption on long-term capital gains if bought within six months of selling the asset.

These bonds, named after Section 54EC of the Income Tax Act, 1961, are issued by government-approved entities such as Power Finance Corp. Ltd (PFC), Indian Railways Finance Corp. Ltd (IRFC), and Rural Electrification Corp. (REC). But, with a fixed return of 5.25% and a 5-year lock-in, are they the best use of your money?

If you can earn an annual return of more than 8% elsewhere—say, in a mutual fund—you may be better off paying the tax and investing the rest. Over five years, an 8% annual return on the post-tax amount could surpass the maturity value of a 54EC bond.

Mint spoke with experts to help you decide which option is right for your financial goals and risk appetite.

What do the experts say?