Tax-saving bonds and tax-free bonds are aimed at two different segments of people - While one lets investor enjoy tax benefits on the principal amount, the interest accrued on the other option is completely tax-free.
Even though these are ideal tax-saving financial instruments, most people get confused between these two options.
To claim tax benefits, most people are now busy looking for investment options this tax season. Starting from insurance to repayment of education loans, a lot of such investments are exempted from tax.
Having said so, investors who are looking for further tax-saving options can look at Tax-Saving and Tax-Free Bonds. Experts say even though these are ideal tax-saving financial instruments, but most people get confused between these two options.
Firstly, tax-saving bonds and tax-free bonds are aimed at two different segments of people and are two different types of investment options. While one lets investor enjoy tax benefits on the principal amount, the interest accrued on the other option is completely tax-free. Similarly, while one comes with a lock-in period of 5 years, the other has no lock-in period.
Here is how Tax-saving bonds and Tax-free bonds differ;
These bonds offer tax benefits to owners, therefore helping them save a certain portion of their overall tax.
Investors can earn a certain interest on these bonds if opted for, along with 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 investors get the benefit of tax deductions up to Rs 20,000. Hence, one can reduce his/her taxable income by Rs 20,000 in a year.
Note that the interest earned through the bond is taxable. Deduction offered under section 80CCF is over and above tax deduction u/s 80C that offers tax benefit up to Rs 1.5 lakh.
Tax-saving bonds come with a minimum lock-in period of 5 years and are ideal for mid-long term investments.
Returns from these tax-saving bonds are low when compared to other investment as these are low-risk options. Hence, experts say, conservative investors who want to invest without high risk, could consider this investment option.
Additionally, investors looking for long-term returns could also opt for these tax-saving bonds, as they are not suitable for individuals looking for short-term returns.
As per Section 10 of the Income Tax Act, 1961, these tax-free bonds do not attract tax on the interest earned from these bonds. Hence, the interest earned from these bonds is tax-free, unlike tax-saving bonds.
Investors, however, do not get any tax benefits on the amount invested in the tax-free bonds. These bonds are not eligible for deductions under section 80C of the Income Tax Act. Also, tax-free bonds do not yield tax benefits on the principal amount of the bond, unlike tax-saving bonds.
These tax-free bonds offer a slightly higher interest rate as compared to tax-saving bonds.
Tax-free bonds are generally for long-term investment, with a tenure of up to 20 years, and investors can invest up to Rs 5 lakh in tax-free bonds.
These bonds can also be listed on the stock market. Even though the interest earned from these tax-free bonds is free from tax, note that capital gains from selling these tax-free bonds in the secondary market are taxable.
Also, keep in mind the benefits gained from these bonds depend on the income tax slabs that an investor falls under.