These are popular financial instruments for tax saving among investors, but most people get confused between the two. Aimed at two different segments of people, tax-savings bonds and tax-free bonds are two different types of investment options.
Most of us are now busy looking for investment options through which we can claim tax benefits this tax season. From life insurance to repayment of education loans, a lot of such investments are exempted from tax. However, investors looking for further tax-saving options can look at Tax-Savings Bonds and Tax-Free Bonds. These are popular financial instruments for tax saving among investors, but most people get confused between Tax-Free Bonds and Tax-Savings Bonds.
Aimed at two different segments of people, tax-savings bonds and tax-free bonds are two different types of investment options. With one investor can enjoy tax benefits on the principal amount, whereas with the other the interest accrued is completely tax-free. One comes with a lock-in period of 5 years, the other has no lock-in period.
Tax-saving bonds vs Tax-free bonds: Find out what is the best option for you:
As the name suggests, Tax-Saving Bonds offer tax benefits to owners, which help them save a certain portion of their overall tax. Investors can opt for these bonds and earn a certain interest on them, along with the special provision in the Income Tax Act offering tax benefits on investments.
Under Section 80CCF of the Income Tax Act, a special provision for tax saving bonds is offered, under which investors get the benefit of tax deductions up to Rs 20,000. Hence, you can reduce your taxable income by Rs 20,000 in a year. However, the interest earned through the bond is taxable. Deduction under section 80CCF is over and above tax deduction under section 80C that offers tax benefit up to Rs 1.5 lakh.
Tax-saving bonds are a mid-long term investment tool and come with a minimum lock-in period of 5 years.
Experts suggest this investment option to be ideal for conservative investors who want to invest without high risk. Returns from tax saving bonds are low when compared to other investment as these are low-risk options, unlike other instruments which are generally associated with high risk. Also, investors looking for long-term returns should opt for tax-saving bonds, as they are not suitable for individuals looking for short-term returns.
Tax-Free Bonds do not attract tax on the interest earned from these bonds as per Section 10 of the Income Tax Act, 1961. Unlike tax-saving bonds, the interest earned from these bonds is tax-free. Investors, however, are not entitled to any tax benefits on the amount invested in the bond. Tax-free bonds are not eligible for deductions under section 80C of the Income Tax Act. Unlike tax-saving bonds, this investment does not yield tax benefits on the principal amount of the bond.
When compared to tax-saving bonds, tax-free bonds offer a slightly higher interest rate and investors can invest up to Rs 5 lakh in tax-free bonds. Tax-free bonds are generally long-term investment tools, with a tenure up to 20 years.
If investors want to sell these bonds, they can also be listed on the stock market. However, though the interest earned from tax-free bonds is tax-free, capital gains from selling these tax-free bonds in the secondary market are taxable.
Investors also need to understand that the benefits gained from these bonds depend on the income tax slabs that they fall under.