Tax Saving Bonds - Interest Rate, Maturity and How to Invest?

While every taxpayer would like to save taxes, not every taxpayer is comfortable with the high risk of investment options that are eligible for tax deductions. Thus, to make sure that even risk-averse investors have several options to choose from, the Indian government has introduced many different types of investment plans, schemes, bonds, and more.One of the most popular of them is tax-saving bonds. These are government-backed bonds that generate fixed interest income for the investors and are also eligible for tax deductions. Take a look at what these bonds are and how they can help you save taxes.

Any type of bond is just a document that certifies that an investor has invested a particular amount and is entitled to receive fixed benefits/returns for the same. So, these tax-saving bonds are bonds offered by the Indian government for risk-averse investors looking for a medium-term investment option that could help them reduce their income tax liabilities.Note that tax-saving government bonds are entirely different from tax-free bonds. The tax-free bonds are generally offered by government-backed entities such as HUDCO, IRFC, NHAI, etc.

Under Section 80CCF of the IT Act, the tax-saving bonds have special privileges that allow investors to reduce their income tax liabilities by up to Rs. 20,000 in a financial year. In other words, if you have already used other deductions and exemptions but still looking for ways to reduce your tax liabilities, you can reduce the same by up to Rs. 20,000 by investing in these tax-saving bonds.But unlike tax-free bonds, the interest you earn from tax-saving bonds are not tax-exempt. Only the initial investment amount of up to Rs. 20,000 is eligible for a tax deduction in a financial year.

The interest rate varies between the bonds. For instance, the 8% Savings Bond was a very popular tax-saving bond for investors in the 0% to 20% tax bracket. In 2018, it was replaced by the GOI 7.75% bond.The Savings Bond had a maturity of 5 years. But the new GOI bond has a maturity of 7 years.

If you want to invest in tax-saving bonds , you can do this by visiting the nearest branch of SBI. Apart from SBI, there are more than 20 other nationalized banks that can help you invest in these bonds. The minimum investment amount for these bonds is Rs. 1,000.You will be required to fill up a revised form either online or offline and submit appropriate documents along with a cheque or demand draft of the amount you’d like to invest. But note that you’ll need a Demat account for investing. Once invested, you will receive the bond in your BLA (Bond Ledger Account), along with the CoH (Certificate of Holding).

Any risk-averse investor wanting to save taxes after entirely using the popular tax deductions can consider investing in these bonds. As the government backs these bonds, they come with minimum to no risk.Also, the maturity period of 5-7 years makes them an excellent choice for investors with a mid-term investment horizon. Understand the terms and conditions of these bonds before investing to ensure that your investment delivers the expected benefits.

Under Section 80CCF of the Income Tax Act, individuals can claim a deduction of Rs. 20,000 on tax-saving bonds owned by them. This means that an investor reduces his taxable income by Rs. 20,000 in a year. This is excluding the deduction of Rs. 1.5 lakh provided under Section 80C of the Income Tax Act.

Tax-saving bonds have a lock-in period of 5 years. This means that the investment amount cannot be withdrawn during this period. Money can only be withdrawn during its maturity. That is when the tenure of the investment is completed. Anyone investing in tax-saving bonds should keep these things in mind and then make an investment. The term of deposit (lock-in period) makes tax-saving bonds a mid to long-term investment.

The different types of tax-saving bonds are:Inflation index bonds - they provide protection against inflation to the principal as well as the interest component. The tenure of these bonds is 10 years, and only retail investors can apply for these bonds. Any change in the inflation rate is adjusted with the principal amount, and the interest is calculated on the adjusted principal amount. During redemption, a higher return is paid.

• Fixed-rate bonds in these types of bonds, the interest rate is reset after every 6 months. The pay-out is half-yearly, and there is no option for cumulative interest. The 7.75 per cent government savings bond was replaced by this bond in the year 2020.
• Floating rate bonds the interest rate of this bond keeps changing and is announced beforehand. Usually, it changes in 6 months, and the interest rate is adjusted accordingly.
• Sovereign gold bonds these bonds are denominated in multiples of grams of gold. 1 gram being the lowest and 4 kg being the maximum limit. They were a substitute for buying actual gold in its physical form. Upon redeeming, the payment is based on the current market value of gold. The investment is for 8 years. However, after 5 years, it can be encashed. Interest is calculated half-yearly and is added to the amount which is payable on its maturity. TDS is not applicable.
• Zero coupon bonds they are issued at a discount, and no interest is paid on them. On maturity, the investor receives the face value of his investment. The profit, in this case, is the difference between the principal amount and the face value.
• Bonds with call and put option in the call option, the issuer of the bond has the option of buying back the bond with the principal amount. The Put option is to exit the bond and receive the principal amount before its maturity.

There are no limits or restrictions on the purchase of bonds. Any individual can purchase any number of bonds depending upon the funds available for investment . Investing in bonds would also mean blocking some of your resources for a certain period of time.

Tax-free bonds make the interest tax-free. These are bonds issued by the Government to raise funds for a particular purpose. They have a longer lock-in period. The lock-in period for tax-free bonds is between 10 years to 20 years. During this time, withdrawals cannot be made, nor can they be sold. Thus, if a person has surplus money and is in a position to block a certain amount for such a long time, only then this sort of investment should be made. These are an ideal form of investment for investors who fall in the highest tax bracket. They are also a good investment for senior citizens who are looking for a fixed income.

When someone (who has invested in bonds) passes away, the bond is automatically transferred to a survivor or the co-owner of the bond. Such a person acts as a beneficiary, and the bond goes directly to that person.In case the deceased person was the sole or all holder of the bond, then he must have nominated someone. If so, then it will be transferred to the nominated person. The affidavit, application and other documents (like a death certificate attested by a Notary, self-attested copy of PAN, bank details etc.) are required to be submitted. On the basis of these, the bonds are transferred to the nominee within 30 days.In case the deceased person is the sole or all holder and has not nominated anyone, then the bonds are transferred to the legal heir of the deceased. The application of the heir has to be supported with legal documents.

Tax-saving bonds attract taxes, but such investments are eligible for tax deductions. On the other hand, tax-free bonds do not attract taxes on interest earned.
Tax saving bonds have a provision for deduction under Section 80 CCF. Tax-free bonds are not eligible for deduction under Section 80C .In Tax saving bonds, the interest earned is taxable by the Government. In tax-free bonds, the interest earned is not taxed by the Government.In Tax saving bonds, the deduction permitted is a maximum of Rs. 20,000 per year. For tax-free bonds, there are no deductions permitted.

Tax-saving bonds are issued by the Government to raise funds for a particular purpose. These funds are used for public welfare programs. They are seen as a risk-free investments because the Government guarantees the returns.

The interest on tax-saving bonds is paid every 6 months, or it gets compounded and gets paid annually. The interest is received by the investor directly into the bank account. Tax-saving bonds are a good investment for senior citizens, investors with low-risk appetites and individuals who have planned their financial goals and savings for a specific reason.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.