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    Learn with ETMarkets: Difference between tax-free and tax-saving bonds

    Synopsis

    Tax-free bonds and tax savings bonds are investment options that offer tax benefits to investors in India. Tax-free bonds provide completely tax-free interest income, have a generally higher interest rate and no lock-in period, while tax savings bonds provide tax benefits on the principal amount, have a relatively lower interest rate, a 5-year lock-in period and the interest income is taxable. Moreover, Section 80CCF allowed taxpayers to claim deductions for long-term infrastructure bonds, but the option was terminated from FY2012-13. Finally, capital gains bonds offered by government-backed entities provide investors with the ability to invest capital gains from property sales and avoid paying taxes on such profits.

    Learn with ETMarkets: Difference between tax-free and tax-saving bondsGetty Images
    In this world, nothing can be said to be certain, except death and taxes.

    –Benjamin Franklin

    The statement illustrates the inevitable nature of these two occurrences in life. All living things inevitably pass away, and taxes are an essential component of contemporary civilization. The government uses taxes as a means of raising money, which it then spends on infrastructure and other public services. Governments would struggle to provide necessary services like healthcare, education, public safety, and transportation without taxes.

    Taxation has long been a serious problem in India. Different taxes are imposed at various levels within the nation's tax structure. Investors are searching for tax-saving investments to lessen their tax liability. The two options that are frequently mentioned to reduce one's tax obligation are tax-saving bonds and tax-free bonds. But investors frequently become confused between tax-free bonds and tax savings bonds. Both offer tax benefits but in different ways. They have varied characteristics and features. In this article, let’s discuss the difference between tax-free bonds and tax savings bonds in detail.

    Tax-free Bonds

    Tax-free bonds and tax savings bonds are both investment options that offer tax benefits to investors. But there are some distinct differences. Here is a comparison of the two investment options:



    Tax Free Bonds

    Tax Savings Bonds

    Feature:

    Interest generated is completely tax free

    Provides tax benefits on the principal amount

    Interest Rate:

    Generally higher than other tax saving bonds and the interest income is tax free

    Relatively lower than tax free bonds and the interest income is taxable

    Tenure:

    Usually long-term, with maturities ranging from 10 to 20 years

    Usually medium-term, with maturities ranging from 5 to 10 years

    Lock-in period:

    No lock-in period. These bonds can be eventually sold in the exchange. If sold before maturity date, capital gains tax applies

    5 years lock-in period. Investors can’t sell their bonds before maturity

    Section of Income Tax:

    Section 10(15)

    Section 80CCF

    Tax Benefits:

    Interest income is tax free. No tax deduction at source (TDS) on interest income

    Interest income is taxable. Section 80C of the Income Tax Act allows investors to claim tax benefits up to a maximum of Rs. 20,000.



    Tax savings bonds u/s 80CCF

    Investment tools called "infrastructure bonds" or "tax saving bonds" are developed to help people reduce their tax obligations. These bonds are great for individuals who have a limited tolerance for risk but yet want to maintain their income over the long term and save on taxes. The Income Tax Act of 1961 received a new provision, 80CCF, in the union budget for the 2010–11 fiscal year.

    Deductions from income taxes are allowed under this clause for purchases of long-term infrastructure bonds. Investors can deduct up to Rs 20,000 in taxes from the price of these bonds, which lowers their taxable income. It's crucial to remember that the interest that is generated on these bonds is taxed.

    Additionally, it is crucial to remember that the tax deduction provided under Section 80CCF is in addition to 80C, which offers tax benefits up to Rs. 1.5 lakh. It is worth noting that the option to claim a deduction for investing in tax savings bonds was terminated starting from the fiscal year 2012-13. The deduction is no longer applicable.


    Capital gains exemption bonds u/s 54EC
    The government-backed entities IRFC, PFC, and REC offer capital gains bonds, which allow investors to invest capital gains from the sale of property while avoiding paying taxes on such profits.

    Tax-Free Bonds v/s Tax Savings Bonds
    Tax-free bonds and tax savings bonds are both investment options that offer tax benefits to investors. But there are some distinct differences. Here is a comparison of the two investment options:

    Tax-Free Bonds
    Tax Savings Bonds

    Interest generated is completely tax-free

    Provides tax benefits on the principal amount

    Interest Rate:
    Generally higher than other tax-saving bonds and the interest income is tax-free

    Relatively lower than tax-free bonds and the interest income is taxable

    Tenure:
    Usually long-term, with maturities ranging from 10 to 20 years

    Usually medium-term, with maturities ranging from 5 to 10 years

    Lock-in period:

    No lock-in period. These bonds can be eventually sold in the exchange. If sold before the maturity date, capital gains tax applies for 5 years lock-in period. Investors can’t sell their bonds before maturity

    Section of Income Tax:

    Section 10(15)

    Section 80CCF

    Tax Benefits:

    Interest income is tax-free. No tax deduction at source (TDS) on interest income

    is taxable. Section 80C of the Income Tax Act allows investors to claim tax benefits up to a maximum of Rs 20,000.

    In conclusion, both tax-free bonds and tax savings bonds provide investors with alluring tax advantages. Government-backed companies issue tax-free bonds, which provide tax-free interest income. Contrarily, tax savings bonds have a medium-term maturity duration, a 5-year lock-in period, and a relatively modest interest rate. Additionally, while the interest income from tax-savings bonds is taxable, investors are still eligible for tax advantages under Section 80C of the Income Tax Act.

    (The author is Co-founder, IndiaBonds.com) (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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