Tax saving bonds and tax-free bonds are low-risk, high return investments that help you save taxes. These bonds are suitable for investors who are looking for the safety of their investment and regular income flow.
What is the difference between Tax-Saving and Tax-Free bonds?
There are two types of GoI bonds.
- Taxes: The principal and interest earned on Tax-free bonds are exempted from taxes, while for tax-saving bonds, only the principal amount is exempted from tax. Tax is levied on interest earned from tax saving bonds.
- Interest: Tax-free bonds offer a higher rate of interest than tax-saving bonds.
- Tenure: Tax-free bonds have a higher tenure while tax-saving bonds have the facility for early encashment after the fifth year. Tax-free bonds are long term investments and are therefore not suitable for investors who are looking for quick returns. Tax-saving bonds are medium to long term investments.
Features and Benefits
- High-Interest Rate: Tax-saving bonds attract a higher rate of interest than a standard savings account.
- Interest pay-out: Interest on tax-saving bonds is paid out twice a year; on 31st January and 31st of July. Taxpayers can also opt for compounded interest; in this case, the interest is calculated half-yearly, but the entire interest amount is paid on maturity. The interest earned on the bonds is taxable as per the income tax slab.
- Tenure: Tax-saving bonds have a minimum lock-in period of 5 years and a maximum term of 40 years. Early encashment is available after the fifth or seventh year.
- Higher limit: The minimum amount for bonds is Rs.1000, and there is no upper limit for most the bonds.
- Tax Benefits: Under Section 80CCF, taxpayers enjoy special deductions on tax-saving bonds. Individual taxpayers can avail a maximum tax deduction of Rs. 20,000 under this section of the Income Tax Act. This deduction is exclusive of the tax benefit of Rs. 150,000 available under section 80C.
- Eligibility: Indian nationals and Hindu United Family can invest in GOI bonds. Bonds can be held jointly or can be bought on behalf of minors. These bonds are not transferrable.
- Low Risk: Tax-saving bonds have lower risks than other investment instruments like shares or equity.