Tax-Saving Infrastructure Bonds: Know how much tax to be paid on maturity and how to avoid TDS

The tax-saving long-term infrastructure bonds issued in the Financial Year 2011-12 to provide deductions up to Rs 20,000 from the taxable income under section 80CCF of the Income Tax Act are maturing in FY 2021-22.

Although the bonds provided tax benefits u/s 80CCF at the time of investment, the interest on the bonds is, however, taxable in the hands of investors.

So, the tax-saving long-term infrastructure bonds were basically not the tax-free bonds.

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There were two options provided to the investors – the annual interest payout option and the cumulative interest option.

While the investors who opted for annual interest payouts have already paid the tax on the amount of interest received, the investors who opted for the cumulative option would end up paying more tax than the tax saved in the year of investment.

Infrastructure Bond: Confusion over Tax-Saving Vs Tax-Free Bonds makes taxpayers pay more tax than benefit availed

Taxation

As the interest on long-term infrastructure bonds are taxable, the interest earned – annually for the investors opted for annual option and aggregate on maturity for the investors opted for the cumulative option – by the investors will be added to the taxable income of the respective investors.

So, for the investors in lower tax brackets, tax payable will be lower and it will be higher for those in higher tax brackets.

TDS

For Resident taxpayers opted for the cumulative option in physical format, the interest payment will be subject to Tax Deducted at Source (TDS) at 10 per cent for cases where the interest payments upon redemption exceed Rs 5,000.

In case such a bondholder does not have a valid PAN or, in case the investor has not filed his tax returns for the last two years and aggregate TDS and TCS in each of those years is Rs 50,000 or more, the TDS rate will increase to 20 per cent.

No TDS will be applicable for the investors holding the bonds in demat form.

For Non-Resident taxpayers, TDS at 31.2 per cent would apply on the interest payouts.

How to save TDS

To avoid TDS, Resident bondholders have to submit 15G / 15H as applicable. Those who had not provided PAN details at the time of investment, need to update the PAN with the respective RTAs within the stipulated time given by the respective issuers of the bonds.

Non-Resident bondholders need to submit a tax officer’s order under Section 197 / 195 specifying NIL / lower TDS rate to the respective RTAs within the stipulated date to ensure that TDS as per rates specified in the order is applied.