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Last Updated : Feb 06, 2020 12:44 PM IST | Source:

Guide on tax-saving bonds: How it works, features and benefits

Tax saving bonds are an investment instrument that can help you to save taxes. Get a detailed overview of how tax saving bond works, including its key benefits and features of tax saving bonds. Click here to know more!

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Representative Image

Investors are always on a lookout for attractive investment options that can reduce tax liability and fetch decent returns. Tax saving bonds are an investment instrument that can help you to save taxes. The initial investment made for purchasing a tax saving bond is exempt under the provisions of the Income Tax Act.  These bonds have a minimum lock-in period of 5 years.  The chief attraction offered by tax saving bonds is minimal risks and average returns, making it ideal for a broad base of investors. Section 80 CCF of the Income Tax Act provides for deductions that can be claimed in respect of tax saving bonds. It is important to note that the interest that is earned on a tax saving bond does not enjoy the benefit of deductions. It is fully taxable at the hand of the investor. Most tax-saving bonds are in the infrastructure sector as the government wants to encourage more investors to support the long-term investment plans in the infrastructure sector by providing tax breaks.


How Tax Saving Bonds work?

Tax saving bonds work by offering attractive taxation rates on various components. For example, in the case of annual interest-paying bonds, there are two types of incomes that are taxable. The interest accrued on such bonds is taxable is on the accrual or receipt of the same, depending on the method of accounting followed, whereas the premium or redemption amount on sale is taxed as capital gains when the bond is sold or redeemed. There are also some bonds that are structured as tax-free bonds. In this case, no tax is levied on the interest received from such bonds.


What is Section 80CCF?

Section 80CCF is a provision of the Income Tax Act that offers tax benefits to assesses who invest in infrastructure and other types of bonds. The tax reliefs provided under this section are in addition to the standard deductions under Section 80C. As per the current rates, the assessee is eligible to get a deduction of INR 20,000 per year under Section 80CCF for the investments made in infrastructure and other types of tax saving bonds. These reliefs are useful as they reduce tax liability significantly. Individuals and Hindu Undivided Family are eligible to claim the benefits under Section 80 CCF.


Furthermore, only Indian residents can claim tax reliefs under this section. There is no restriction posed by this section on the number of bonds one can invest in. However, the deduction amount is capped at INR 20,000 only. You can also invest in bonds jointly, but only one assessee will be eligible to enjoy the tax reliefs.


Features and benefits of tax-saving bonds

As is evident from the nomenclature, tax saving bonds offer numerous tax benefits to the investors. These bonds are classified as a mid-long-term investment option and are ideal for those who want to enjoy good returns without a considerable risk appetite. It is also important to remember that the interest earned from these bonds is taxable at the hand of the investor. The deduction under Section 80CCF for tax saving bonds is exclusive of the tax benefits under Section 80C.


The key features of tax saving bonds are as follows:

  • They are low-risk investment instruments making it ideal for those who have just started their investment journey

  • An investor has the option of choosing between a cumulative option and a non-cumulative option

  • The rate of interest offered by these bonds is typically higher than other instruments

  • There is no upper limit on the investment amount on these bonds

  • The bonds have a more extended maturity period

  • There is a lock-in period of 5years on these bonds

  • The maximum amount of deduction that one can enjoy from tax saving bonds is INR 20,000

  • These bonds are not suitable for those investors who are expecting short-term returns

Difference between tax-saving bonds and tax-free bonds

Many investors get confused between the terms tax saving bonds and tax-free bonds and use them interchangeably. However, it is crucial to understand the difference between the two to make the right choice for investment. Tax saving bonds only offer tax relief on the principal amount of the bond, whereas the interest component of tax-free bonds is exempt from taxation. Further, tax-free bonds do not have any lock-in period.

The rate of interest offered by tax-free bonds is higher than the interest rate of tax saving bonds. An investor has the option to invest up to INR 5 lakhs in tax-free bonds. The tenure of such bonds is slightly longer and run up to 20 years. There is no tax relief enjoyed on the principal amount invested in tax-free bonds. It is also important to note that if an investor sells tax-free bonds, the sale attracts capital gains that are taxable at the applicable rates. The tax benefits offered on tax-exempt bonds is governed by Section 10 of the Income Tax Act, 1961. It is also worth noting that tax-free bonds are not eligible for any deductions under Section 80C of the Income Tax Act 1961.



Rajiv wants to invest in instruments that can help him to save taxes. What are some of the popular options available for him?

Tax saving bonds are a good option that he can consider. The advantage of these instruments is that these bonds enjoy tax exemption under the provisions of Section 80CCF of the Income Tax Act, 1961. The maximum amount of exemption is INR 20,000. It is over and above the deductions under Section 80C, 80CCC, and 80CCD.


Priyanka has been advised to invest in an income tax saving scheme. What are some of the good options that she can consider? Is tax saving FD a good option?

Priyanka can consider investing in infrastructure bonds that offer tax benefits. The maximum amount of deduction enjoyed is INR 20,000. However, the interest earned from these bonds is fully taxable at the hand of the investor. If she invests in tax saving Fixed Deposits, she will not enjoy any tax benefits on the interest earned.


Mitali is on the lookout for tax saving schemes.  Her son is planning to go abroad and pursue higher studies. Would it be advisable for Mitali to avail of an educational loan in order to save taxes?

Yes, it is an option for Mitali. As per the provisions of Section 80E of the Income Tax Act, Mitali is eligible to claim the full amount of interest on the educational loan as a deduction from total gross income. This deduction can be claimed prior to the computation of the total taxable income.


Raj has taken a health insurance policy for his parents, who are senior citizens. Can he claim a tax deduction on the premium amounts paid by him?

Yes, payment of premium can be claimed as deduction from the taxable income. As his parents are senior citizens, Raj is eligible to claim a maximum of Rs. 30,000 as a deduction.


Is it possible to open a five year fixed deposit with a nationalized bank and enjoy tax-saving benefits from the same?

Fixed deposits with banks are an excellent choice for reducing tax liability.  The deductions can be claimed under Section 80C of the Income Tax Act.  These fixed deposits have a lock-in period of 5 years when no withdrawals are allowed.  Please note that the interest earned on the fixed deposits do not have any tax benefits and are fully taxable at the hand of the investor. Nevertheless, one must consider investing in fixed deposits as it offers a much higher rate of interest when compared to standard FDs and savings accounts.


Are any tax deductions available for investments made in ULIPs?

Yes, Section 80C provides for tax deductions on the revenue generated from ULIPs. It is a good option for those who are new to the world of investment.


Is it possible for a corporate entity to invest in tax saving bonds and enjoy the benefits?

No, corporate entities cannot make such an investment. Only individuals and Hindu Undivided Family are eligible to make an investment.


Why is tax saving bonds attractive to investors?

It is a low-risk investment instrument and offers a good rate of returns. It also provides tax benefits that are over and above the limits under Section 80C.


Is tax saving bonds recommended for those who want to get maximum returns in a short period?

No, tax saving bonds are not a good option. There is a lock-in period of 5 years.


Is a minor eligible to invest in tax saving bonds?

No, a minor cannot invest in these bonds.


What documentation is required for investing in tax saving bonds?

Details of PAN card and valid ID proof would be required. The investor would also be required to furnish the details of the bank account.


Is the interest earned from tax saving bonds eligible for tax deduction?

No, the interest is fully taxable. Only the interest from tax-free bonds is exempted from taxation.
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First Published on Feb 6, 2020 12:44 pm
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