To use 54EC Bonds or Not?

It may be better to change the focus and first ask the following questions to yourself:-

•  Are you fine with a lock-in (54EC Bonds) or do you want liquidity option too (general investments – FDs, MFs, Equity etc)? Allocate marks to this aspect.

•  What kind of risk are you prepared to take when investing your money in this case? 12% implies you're looking at a full-equity option. 54EC means you're looking at zero risk option. Don't compare apples and oranges grapes.

•  If you don't consider taxation here, you're not even starting correctly. 54EC bonds are 30% taxed (assuming the group members are in highest tax brackets; let's forget the surcharge here) and Equity is 10% tax, implying you're saving 67% of the tax.

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So finally, what does the math work out to on 50 Lakhs Capital Gains:-

1.  If you invest in 54 EC bonds, you have zero liquidity for 5 years, safety is 100%, corpus grows to Rs 64,57,740 but you get Rs 59,88,806 after tax which comes to you in the form of interest paid over 5 years and you get your 50L back on maturity.

2.  If you invest in equity (equity MFs or direct equity), you have high liquidity for 5 years, corpus grows to Rs 70,49,367 but you get Rs 66,79,728 after tax. This assumes 12% annualised return at high risk.

Analysis:

1.  In 54EC Bonds investment, you get an assured amount with literally no risk. However, that amount is almost 12%, ie, Rs 6.9 Lakhs, lesser taking tax into consideration in both the case.

2.  54EC bonds lock you in for 5 years. No such thing in equity.

3.  Whether you will get 12% returns or not, or much more or much less, typically depends on two things – how have you invested and the markets. If the investments are done wrongly in equity, then maybe even 54EC type of returns may not come. On the other hand, good equity investments over 5 years have the capability to generate better returns.

4.  54EC money will come to you in penny pockets – 5 yearly interest instalments. The problem with such returns is that, being small amounts, they get merged in the savings bank and just after a few days, one doesn't even remember the money ever came. One has to be very diligent to invest it consistently when it hits the bank account.

Having got this holistic view, now choose what you wish to do!!