As per provisions of Income Tax Act, 1961, any long term capital gains arising from transfer of any capital asset would be exempt from tax under section 54EC of the Act if:

• The entire capital gain realized is invested within 6 months of the date of transfer in eligible bond.
• Such investment is held for 3 years.
• To avail of capital gain exemption, the bonds so acquired cannot be transferred or converted into money or any loan or advance can be taken on security of such bond within 3 years from date of acquisition else, the benefit would be withdrawn.
• If the amount invested in bonds is less than the capital gains realized, only proportionate capital gains would be exempt from tax.

TAX-FREE BONDS
Tax Free Bonds are instruments where interest earned is not taxed. However, there is no deduction for the principal invested in these bonds. These bonds will be eventually listed on the Bombay and National Stock Exchange, so investors will have the option of selling them before the full term of the bond. However, the price you may get for selling before they mature will depend on market conditions.