Tax Saving Bonds

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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 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.

How Do Tax-Saving Bonds Work?

A bond is a document which promises the holder benefits in return for an investment. Tax-saving bonds offer special tax benefits to the holders, which help them save a portion of their overall tax. Tax-savings bonds offer affordable taxation rates on different components. Holders also earn an attractive rate of interest on these bonds.

Which are the different Tax-saving bonds?

You will find many tax-saving bond issues from time to time. Here is an overview of the more recent ones:

7.75 per cent Government Savings Bonds: The 7.75 per cent GOI savings bonds can be held in Demat accounts and are issued by nationalised and private banks or by the Stock Holding corp. These bonds have a tenure of 7 years, and the minimum subscription is Rs. 2000. As per the new government regulations in May 2020, these bonds have been discontinued. These have been replaced by
Inflation-indexed bonds: Inflation-indexed bonds provide inflation protection to the principal and the interest. Only retail investors can apply for these bonds. The tenure of inflation-indexed bonds is ten years, and the interest is paid on a half-yearly basis. Change in the inflation rate is adjusted in the principal, and the interest is calculated on the adjusted principal. During redemption, the higher return is paid, adjusted principal or face value.
Floating rate bonds: The interest rate of these bonds periodically change which will be announced in advance, like a floating bond can have a pre-announced interval of six months, which means that in every six months the interest rate of the bond will be adjusted.
Fixed-rate bonds: The interest rate on the fixed-rate bond is 7.15%. This interest rate resets every six months. Unlike other bonds, there is no option for cumulative interest; the coupon pay-out is made half-yearly. These bonds were launched in July 2020, after the discontinuation of the 7.75% bonds.
Sovereign Gold Bonds: These bonds are denominated in multiples of a gram of gold, where 1 gram is the lowest unit. The maximum limit is 4kg. These bonds were created as a substitute for buying physical gold. These bonds have low risk as the redemption payment is based on the current market value of gold. The tenure for these bonds is eight years, early encashment is allowed after the fifth year. The interest is calculated semi-annually but is paid at the time of maturity along with the principal. TDS is not applicable on SGBs.
Bonds With Call and Put Options: The call option enables the issuer of the bond to call back the bond before its maturity. The issuer has to buy back the bond with the principal amount. The put option is to exit the bond. This gives the holder the right to seek repayment of the principal amount before maturity.
Zero-coupon bonds: Zero-coupon bonds are issued at a discount. No interest is paid on these bonds. On maturity, the holder received the face value of his investment. The difference between buying value and face value is the profit instead of the interest.

Bonds are non-transferrable have low liquidity. However, since many bond issues are government-backed, they have low risk and offer you great returns. Tax saving bonds are a great option for investors who are looking for long term investments to build capital for future needs. Savings bond are not as popular as other investment options that give higher returns but are preferable for investors who are looking for low-risk investments and want a steady income flow.

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FAQs - Frequently Asked Questions

Who issues Tax Savings bonds? Is payment guaranteed on maturity?

The issuer of tax-saving bonds is RBI on behalf of the government. Since the government backs these bonds, the payment on maturity is assured. GOI savings bonds are ideal for investors who look for a risk-free fixed return on their investment.

Who issues Savings bonds? Is payment guaranteed on maturity?

The issuer of these bonds is the government of India. Since these bonds are sovereign bonds, payment is guaranteed.

When is Interest Payable?

Interest on GOI savings bond is payable every six months from the date of issue or compounded and paid at the end of the year as opted by the investor.
However, the currently available 7.15 percent floating rate bonds aren’t eligible for cumulative interest payment. On these bonds, interest will be paid on July/January of every year.

How would I receive the Interest?

Interest is paid in every six-months; or gets compounded and paid at the end of the year. You will receive the interest directly in your bank account. Because of the fixed income nature, GOI tax saving bonds are good investment option for investors with zero risk tolerance, senior citizens and individuals saving for specific purposes, such as retirement.

What is the value date? How is the same determined?

Value date refers to the date from which the bond becomes eligible to receive interest. Brokerages often apply a cut-off time to calculate the value date. Investments made before the cut-off time receive the same day as the value date, and investments made after the cut-off time have a value date on the next day. Similarly, investments made on weekends or holidays have the value date on the next working day.

How can I redeem the GOI savings bond?

You can redeem GOI tax saving bonds on maturity. On maturity, the issuer will credit the proceeds directly to your registered bank account.

Can I use the tax-saving bonds as collateral for obtaining loans?

Government tax saving bonds are an illiquid form of investment and not eligible for trading in the secondary market. For the same reason, these bonds don’t qualify as collateral to receive loans from banks or NBFCs.

Can I transfer the GOI savings bond before maturity?

The currently available 7.15 percent floating-rate government savings bonds are non-transferable unless transferred to the nominee or the legal heir in case of death of the holder.

What are the tax benefits available?

Government tax saving bonds are exempted from wealth tax under the Wealth-tax Act. However, you will have to pay tax on the interest earned based on your income tax slab. The tax will be deducted at source on non-cumulative type bonds while paying the interest time-to-time and will get credited directly to a government account.