Tax Free Bonds: Investments and Redemption
Most people think that tax saving investments and tax free investments are one and the same thing but this is not correct.
Tax Saving Investments is on the one hand is the investment scheme where the amount invested can be claimed as deduction under section 80C having limit of Rs.1 lac such as investment in PF, PPF, ELSS, Insurance Premium, NSC, Tax Saving FD etc. But this does not mean that the interest or return earned on the tax saving schemes is also tax free, for example interest earned on Tax Saving FD and NSC is taxable.
On the other hand Tax Free Bonds/Investments means investment schemes where there is no deduction of the principal amount invested i.e. section 80c has no applicability and also no capping on investment amount. However, the returns or interest earned are fully tax free under Section 10 (15)(iv)(h) of the Income Tax Act i.e. they are not clubbed with your taxable income but you are required to disclose them in your income tax return as exempted income. These bonds require prior approval of Central Government i.e. these bonds are backed by Government.
For Upcoming Tax Free Bonds refer MoneyControl.com.
Redemption of Tax Free Bonds
Tax Free Bonds are backed by Government thus reducing the credit risk and also the worry of getting your capital back on the date of maturity. But one must note that these bonds come with a lock in period of 10 to 20 years that means principal amount is not paid back before the end of the lock-in period.
These bonds are free traded in market i.e. bought and sold on the stock exchanges, so a bond-holder can sell these bonds to other person but not to the issuing authority. The gains on the sale of the bonds are taxed as a Capital Gain.
In case the bonds are sold within 1 year, the gains would be taxed as per the income tax slabs and if the bonds are sold after 1 year then they would be taxed at 10% (without indexation) or 20% (with indexation).
Tax Free Bonds Vs. PPF Vs. Bank FD
|Particulars||Tax Free Bonds||Tax Saving FD||PPF|
|Deduction under section 80C||No||Yes||Yes|
|Time of Investment||When Issue Opens||Anytime||Anytime|
|Duration/Maturity||10-20 Years||Minimum 5 years||Minimum 15 Years|
|Taxation on Return or Interest||Fully Exempted||Taxable||Tax Free|
|Redemption before maturity or Premature withdrawal||Can be redeemed by selling on Stock Exchanges||Cannot be Redeemed||Cannot be Redeemed|
|Minimum Investment||Decided by the Issuing Authority||Rs.10000||Rs.500|
Verdict on “Should You Invest in Tax Free Bonds”?
Thus investing in tax free bonds is good when you are looking for risk free one time investment. However there is a lock in period of investment but over a period of time, there is a high possibility that you should take home handsome returns, with no stock market risk and no credit risk.
There is only one drawback which investors should be aware of is that you may not get the opportunity to invest in periodical interest at the same tax-free interest rates that are offered to you today.