With one the interest accrued is completely free from tax, whereas with the other you can enjoy tax benefits on the principal amount.
Taxpayers are vigorously looking for investment options through which they can claim tax benefits this tax season. There are various options you can look at — from repayment of education loans to life insurance — a lot of such investments are exempted from tax. If you are looking for further tax-saving options, you can also look at Tax-Free and Tax- Savings Bonds. These financial instruments for tax saving are popular among investors, but most people get confused between Tax-Savings Bonds and Tax-Free Bonds.
The two investment options – Tax Saving and Tax-Free Bonds – are aimed at two different segments of people as they are two different types of investment options. For instance, with one the interest accrued is completely tax-free, whereas with the other you can enjoy tax benefits on the principal amount. Also, the lock-in period for one is 5 years, whereas the other has no lock-in period.
Here is how they differ – Find out which one suits you the best;
Tax-Saving Bonds offer tax benefits to the investor, with which they can save a certain portion of their overall tax. By investing in these bonds, not only you earn a certain interest in them, but you also get the special provision in the Income Tax Act offering tax benefits on investments.
A special provision for tax saving bonds is offered, under Section 80CCF of the Income Tax Act. Under this, the investor gets the benefit of tax deductions up to Rs 20,000. This way your taxable income gets reduced by Rs 20,000 in a year. This deduction under section 80CCF is over and above tax deduction under section 80C that offers investors tax benefits up to Rs 1.5 lakh. Note that, the interest earned through the bond is taxable.
According to experts, this investment option is ideal for conservative investors who want to invest without high risk, as tax-saving bonds are mid to long-term investment tools and come with a minimum lock-in period of 5 years.
As compared to other investment options, returns from tax saving bonds are low as these are low-risk options. This investment option is not suitable for investors looking for short-term returns, this should be opted with longer tenure in mind.
Unlike tax-saving bonds, the interest earned from tax-free bonds is tax-free. Tax-Free Bonds do not attract tax on the interest earned from the bonds as per Section 10 of the Income Tax Act, 1961. However, unlike tax-saving bonds, investments in tax-free bonds do not yield tax benefits on the principal amount of the bond. Investments in these bonds are not eligible for deductions under section 80C of the Income Tax Act.
Tax-free bonds offer a slightly higher interest rate when compared to tax-saving bonds. This investment option is a long-term investment tool, with tenure of up to 20 years, wherein investors can invest up to Rs 5 lakh.
Tax-free bonds can also be listed on the stock market in case the investor wants to sell his/her bonds. Note that, capital gains from selling these bonds in the secondary market are taxable even though the interest earned from tax-free bonds is tax-free.
Keep in mind, that the benefits gained from these bonds depend on the income tax slabs that you fall under.