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Tax Saving Bonds

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.

What are Tax Saving Bonds?

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.

What are Tax Free Bonds?

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.

Section 80CCF

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.

Tax Saving Bonds vs Tax Free Bonds

Mentioned below are the differences between Tax Saving Bonds and Tax-Free Bonds:

CriteriaTax Saving BondsTax Free Bonds
SectionSection 80CCF of the Income Tax Act, 1961Section 10 of the Income Tax Act, 1961
Deduction Amount₹20,000Can invest upto ₹5 lakhs
TaxOnly the initial invest is tax free, interest income earned is taxableInterest income earned is tax free
RatesLesser interest ratesHigher interest rates
Lock-in 5/7 years10 years or more

Frequently Asked Questions

How do I invest in Tax Free Bonds?

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.

How much tax is applicable on interest income earned from tax saving bonds?

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.

What are the names of popular tax-free bonds?

Infrastructure bonds offered by National Highway Authority of India, NTPC Limited and Indian Railways, Rural Electrification Corporation are a few popular ones.

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