Tax free Interest Income in India
Investing in the market is no longer exclusive to expert investors but those new to the market can take advantage of a number of investment tools too…
08 Jun, 2022
5 min read
2764 Views
Understand what tax saving bonds are, the taxes applicable to them and how they differ from tax-free bonds.
Understanding the Role of Taxes
India is the second most populated country in the world. Its government recognises that it must impose taxes on its citizens to provide them with a number of facilities that they as the public then get to enjoy. All eligible taxpayers are obligated to pay income tax. Presently the country is home to over 35 million taxpayers who collectively bring in vast sums of money. Although some may view taxes as an expense that they have to endure, for several others taxes may have a huge impact on their lives. The Indian government recognises the fact that it doesn’t want to overburden its citizens with taxes owing to which it offers tax saving bonds such that people have a means of saving tax among other schemes.
Defining Tax Saving Bonds
Tax saving bonds can be understood as instruments offered by the government that are designed to help people save taxes. These special documents provide their owners with tax benefits in accordance with those laid out under the Income Tax Act. Should you choose to invest in these bonds you will need to hold them for the lock-in period which presently amounts to 5 years. Owing to this very fact they are classified as mid to long term investment tools.
A bond here refers to a document that promises its holder outlined rewards and benefits in lieu of them investing in it. An issuer is responsible for issuing these bonds to the owner who’s the person under whose name these bonds exist.
With a tax saving bond, it is possible for bondholders to save a certain amount on the overall tax they are meant to pay. By purchasing these bonds, individuals stand to earn a certain interest on them.
Although tax saving bonds may not initially catch one’s eye, they provide decent returns and don’t carry the level of risk that is ordinarily associated with other investments. This makes them ideal investments for those who wish to save money without the worry of risking it. If long term returns are sought after more so than immediate returns, tax saving bonds are the way to go.
Taxation Applicable to Tax Saving Bonds
Section 80CCF of the Income Tax Act outlines the privileges tax saving bonds enjoy. Here, individuals are entitled to deductions of up to INR 20,000 on the bonds they own. What this means is that bondholders can reduce their taxable income by up to INR 20,000 each year thereby saving on the overall amount of money they may otherwise have to pay as tax. It is worth noting here that this deduction does not include the INR 1.5 lakh that is outlined under Section 80C of the Income Tax Act.
Exploring the Differences between Tax-Free Bonds and Tax Saving Bonds
The market presently offers tax-free bonds in addition to tax saving bonds. As the name might suggest, tax-free bonds are those that are free of taxes i.e., these bondholders are not obligated to pay any taxes on them. Given that the two forms of bonds have similar names, it is possible to confuse the two. Examine the table below such that you understand the differences that exist between tax saving bonds and tax-free bonds.
|
Area of Consideration |
Tax Saving Bond |
Tax-Free Bond |
|
Broad Definition |
While taxes apply to these bonds, these investments are eligible for tax deductions |
These bonds do not have any taxes levied on the interest they accrue |
|
Income Tax Section Applicable |
The deduction provision applicable to these bonds is outlined under Section 80CCF |
Tax deductions outlined in Section 80C of the Income Tax Act do not apply here |
|
Interest |
The government levies a tax on the interest earned on these bonds |
The government does not levy a tax on the interest earned on these bonds |
|
Permitted Deduction |
Bondholders are entitled to a maximum deduction of INR 20,000 each year |
No deduction is permitted here |
Wrapping Up
Tax-saving bonds are a good idea for those who want to make long-term investments while exposing themselves to limited risks. The value of investing in these bonds lies in the fact that since they are issued by the government, bond owners can rest easy in the knowledge that they will be provided with the rewards they were promised at the time of purchasing the bonds.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.
How would you rate this blog?
Related Blogs
Translate the power of knowledge into action. Open Free* Demat Account
Latest Blog
-
28 Oct, 2021
7 min read
Welfare Loss of Taxation
The entire cost imposed on society by levying a new tax is known as the welfare loss of taxation. These costs are incurred as a result of the tax's a…
-
29 Jul, 2021
8 min read
How are Dividends on Stocks Taxed?
This write-up seeks to shed light on what dividends are and, how they are taxed and all that they entail.
-
27 Jan, 2021
9 min read
Earning From Share Trading & Taxation:...
Investment and taxation go hand in hand. Even before you start investing, update yourself on the tax implications that can affect your ultimate retur…
-
02 Dec, 2021
7 min read
Taxation of Permanent Establishment (PE) in India
Article 5(1) under the Income Tax act of India mentions the Permanent establishment of a firm and the tax levied on its operations. Read this blog to…
-
03 Jan, 2022
4 min read
Taxation Rules for Bond Investors
Interest paid on fixed income investments is frequently taxed. Government, corporate, and municipal bonds all have different taxing rules. Read on to…
-
11 Jan, 2022
7 min read
What Is Double Taxation?
Corporations follow a separate set of regulations and have different duties than other types of businesses. And whether you run a business or are a s…
-
30 Jul, 2021
11 min read
What is Capital Gain Tax and How is it Calculated?
This article highlights the significance of capital gains tax and its calculation, along with their tax exemption clauses
-
12 Feb, 2021
8 min read
Tax Saving Investments: Best ways to...
Whenever the Union Budget is around the corner one thing that keeps people anxious is announcements related to tax reforms.
-
02 Feb, 2022
6 min read
Foreign Investment Funds (FIF) Tax Definition
A foreign investment fund (FIF) is a foreign corporation, a foreign unit trust, a foreign superannuation scheme, or an insurer under a foreign life i…
-
17 Feb, 2021
9 min read
How To Claim Tax Exemptions on House Rent...
There is a provision under the Income Tax Act which allows salaried, self-employed, and professionals to get tax exemption for the house rent paid.
-
15 Mar, 2022
7 min read
What are Indirect Taxes?
Understand all that indirect taxes entail including their advantages and disadvantages by reading this article.
-
20 Aug, 2021
8 min read
What are ELSS Funds?
A form of a mutual fund, an equity-linked saving scheme (or ELSS) allows individuals to invest their money in a tax-saving mutual fund.
-
31 Jan, 2022
7 min read
Deadweight Loss Of Taxation
All you need to know about this economic term and why it is relevant to you as a direct or indirect (via mutual funds) stock market investor.
-
11 Apr, 2022
7 min read
Taxation in 2022: Everything You Need to Know
Walk through the Budget 2022 proposals and understand how they impact taxpayers.
-
02 Mar, 2021
8 min read
How To Receive Tax Benefits From Equity Investment
When we think about equity investment, the first thing that comes to our mind is growing wealth via investing in company shares.
-
01 Feb, 2021
8 min read
Things to do on the day of the Union Budget
The Union Budget is around the corner, and the entire nation is both anxious and hopeful about the upcoming budget.
-
04 Oct, 2021
6 min read
Taxation on Mutual Funds
Mutual funds are widely regarded as an important investment option since they help you achieve your financial goals. They are tax-efficient investmen…
-
01 Dec, 2021
8 min read
Double Taxation Hangs On Big Tech Firms
The Big Tech firms like Google, Facebook, Amazon, Apple, and Twitter are in fear of digital service tax or equalisation levy imposed by countries lik…
-
02 Oct, 2021
7 min read
Income Tax in India - Income Tax Guide
Taxes are the core source of revenue for the government. Among these, income tax has its own significance. It is crucial to understand the Income Tax…
-
23 Mar, 2022
5 min read
Capital Gains Tax
This article helps shed light on all that capital gains tax entails including the factors that impact it.
-
26 Oct, 2021
7 min read
Understanding Taxation on Foreign Investments
Foreign equities and mutual funds are becoming more popular these days as a way of diversifying an investor's portfolio while still profiting from ma…
Ready To Trade? Start with
Subscribe to #SmartSauda Newsletter
CONTINUE WITH GOOGLE
CONTINUE WITH FACEBOOK
