Tax saving bonds are financial securities which are issued by the government of India. These securities come with a tax saving benefit as per the Income Tax Act, 1961 and have a lock-in period of 5/7 years.
A bond is a type of financial security which promises the buyer certain benefits in return for an investment. They are floated by the government and help the buyer reduce their overall taxable income. Individuals can purchase these bonds and will earn interest on the investment as well. Tax saving bonds come with a minimum lock-in period of 5/7 years, hence they make a good investment option for mid/long term.
Since they are floated and backed by the government, they come with a fixed interest rate and are relatively less risky compared to other securities. This makes them ideal among investors who seek less/no risk investment options.
Bonds are a simple way for the government to raise money from the people in order to finance public sector units.
Tax free bonds are financial securities issued by the government of India. They are of low risk and provide a fixed interest rate. As the name suggests, the most attractive feature is absolute tax exemption as per Section 10 of the Income Tax Act of India, 1961. Tax free bonds have a long-term investment horizon of 10 years or more. The most common example of a tax-free bond is that of municipal bonds.
As per Section 80CCF of the Income Tax Act, 1961, an individual taxpayer can enjoy tax deductions of upto ₹20,000/- if they have made investments in government backed listed bonds. An investor can reduce their taxable income by ₹20,000/- in a financial year. This deduction excludes the provision of ₹1,50,000/- under Sec 80C of the Income Tax Act, 1961.
Mentioned below are the differences between Tax Saving Bonds and Tax-Free Bonds:
| Criteria | Tax Saving Bonds | Tax Free Bonds |
|---|---|---|
| Section | Section 80CCF of the Income Tax Act, 1961 | Section 10 of the Income Tax Act, 1961 |
| Deduction Amount | ₹20,000 | Can invest upto ₹5 lakhs |
| Tax | Only the initial invest is tax free, interest income earned is taxable | Interest income earned is tax free |
| Rates | Lesser interest rates | Higher interest rates |
| Lock-in | 5/7 years | 10 years or more |
You can invest in a Tax-Free Bond with a running demat account. The government usually issues a circular regarding the sale of bonds which provides details regarding the sale days. The subscription period for investment is valid only for a few days.
Gains are taxable as per your income tax slab. Sale post one year without indexation comes with 10% LTCG while with indexation, the tax is 20% post one year.
Infrastructure bonds offered by National Highway Authority of India, NTPC Limited and Indian Railways, Rural Electrification Corporation are a few popular ones.
