Tax Free Bonds: Tax Saving Bonds 2022

08 Jun, 2022

5 min read

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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.

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