Want to invest in tax saving bonds? Here is what you should know

by Pankhudi Dave Head Finance Manager

As the name says, the USP of investing in the tax-saving bonds is that your big tax money will be saved. So, if you are looking for a lucrative option of investment that can reduce your tax liability and also get you decent returns, then investing in the tax-saving bonds makes sense.

As per the Income Tax Act, your initial investment in these bonds is exempted. However, you will have to abide by the lock-in period, which is about five years. The main feature of the tax-saving bonds is minimum risks and average returns. As per Section 80 CCF of the Income Tax Act, you can claim deductions as you buy tax saving bonds. Also, on the interest given on the tax-saving bond, deductions cannot be claimed because it is taxable.

Section 80CCF rules

The tax benefit under Section 80CCF is in addition to the standard tax deductions under Section 80C—a deduction of INR 20,000 per year under Section 80CCF may be availed by the investors who have invested in infrastructure or other tax saving bonds. Also, only residents of India can claim tax reliefs. You can invest in many bonds, but the maximum deduction amount will be INR 20,000 only.

Features of tax-saving bonds

Here are the key features of Tax saving bonds:

•    If you are a beginner investor, this is a low-risk investment option for you. The people buy tax-saving bonds for numerous tax benefits. If you want decent returns and low-risk investment option, then the mid-long-term investment is best for you.
•    You can choose between a cumulative option and a non-cumulative option.
•    You get a decent rate of interest by these bonds.
•    Any amount can be invested in these bonds, as there is no capping.
•    These bonds have an extended maturity period.
•    You will have to bear the lock-in period of five years on these bonds.
•    The maximum deduction amount remains to be INR 20,000

• If you want short-term returns, these may not be outstanding bonds for you.

Tax-saving bonds v/s tax-free bonds

Tax saving bonds offer tax benefit on the principal amount not on the interest. There are, however, no exemptions on the principal amount. But they provide exemption on interest too. Also, these do not have any lock-in period. The interest rate provided by tax-free bonds is higher than tax saving bonds.

Government Bonds

GOI bonds are a safe and tax-saving investment option. There are two types of government bonds taken by the people - tax-free bonds and tax saving bonds. When the investment and returns on the bond are not taxed, and the interest is taxed, it is tax-free bond. When returns are taxed, but there is tax benefit from paying Income Tax under Section 80CCF, it is tax saving bonds.

Similarly, you can invest in corporate bonds. Though it is taxable, they are exempt from federal income taxes and sometimes from state and local taxes too.