2022-02-13
Explained: How do Tax Savings Bond Differ from Tax-Free Bonds?
Tax Planning
Tax Saving or say Tax-free are the terms that do
excite the investors, especially to the ones who pay a lot of taxes & that
is when one must find ways to save taxes. Therefore, in this article we will be
discussing two such instruments & how do they differ from each other. They
are Tax Savings Bonds & Tax-Free Bonds. To begin with, before we continue
with this, let us first understand what do bonds mean? So, A bond is a document
that guarantees the holder certain rewards and benefits in exchange for
financial investment. It is made up of an Issuer, which is the company that
issues the bonds, and an Owner, who is the person who owns the bonds. And here,
Tax Saving & Tax-free are two types of Bonds.
What do you mean by Tax Savings Bond?
As the name implies, Tax Savings Bond are the bonds that help us to save Taxes. They provide owners with some special tax incentives. A resident individual or a HUF can invest in these bonds. An individual can buy these bonds & earn a set amount of interest, according to a specific provision in the Income Tax Act that provides tax advantages for investments. These bonds have a minimum lock-in period of five years which makes them a good investment vehicle for the period of medium to long-term investments/goals. One different thing about these bonds is that they cannot be traded in the secondary market like shares or any other securities. The amount that you invest in these bonds has no upper limit.
Furthermore, The two options available while in Tax Savings Bond are - a) Cumulative option & b) Non-Cumulative Option. Under the Non-cumulative option, the interest is paid out every six months to the investors making it a consistent source of income for those who are looking at it. And Under A Cumulative option, the interest is reinvested & paid out at maturity. In this, One can make a minimum investment of Rs. 1,000 & thereafter in the multiples of 1,000.
What do you mean by Tax-Free Bonds?
Tax-Free Bonds are a type of government securities
whose interest is fully exempt from tax & hence it does not count when calculating the total income. The maturity for these bonds is for ten years or more. The corpus accumulated from investors in these bonds is invested in the infrastructure & Housing projects. Since these bonds are government-backed securities, the chances of default are very less. To add-in, the interest earned on these bonds is completely exempt from taxes. The interest on these bonds ranges from 5.50% to 6.50% approximately. Since they have a long lock-in period, the liquidity of these bonds is low. Tax-free bonds can be held in either a Demat or physical form & can also be bought from the secondary market. Furthermore, under the rules of section 115 the profit you make on tax-free free bonds after the sale is subject to taxation. As a result, capital gains earned on the sale of these tax-free bonds before the one-year mark are subject to taxation on the investor's income tax bracket.
Difference Between Tax Savings Bond & A Tax-Free Bond
As these bonds are quite identical, it is easy for the investors to mix these both. And therefore some key differences have been listed below to distinguish between them.
| Tax Savings Bond | Tax Free Bonds |
Tax Saving Bonds have some tax implications but the investments made have certain deductions. Also, the deduction that is availed is Rs. 20,000 under section 80CCF. | Individuals who buy tax-free bonds are not obligated to pay any taxes. But these bonds are not eligible for any deductions like that of Tax Savings Bonds. |
| Interest earned on Tax Savings Bond is subject to taxation | Interest earned on Tax-free Bonds is exempt from taxes |
| Tax Savings Bonds are more liquid as compared to Tax-Free Bonds | Tax Free Bonds are less liquid as compared to Tax Savings Bond |
Lastly, To sum this up an Investor can choose between a Tax Savings Bond & a Tax-Free Bond as per their convenience & choice. If your are a conservative/ moderate risk/looking or a steady income in your retirement years then these bonds can prove to be a good choice. Before investing in this, it is very important to know the different aspects of these bonds. You will not only meet your income needs but also decrease your tax burden if any through these instruments & also making it low risk investment product in the market.
- TEAM IFA