Tax free bonds Vs Tax saving bonds

January 4, 2020 Finance Talk Valli Sarvani No comments

There are tax-free bonds and tax saving bonds. Often, investors may get confused between both and feel it is difficult to choose.

Here are the differences between tax-free bonds and tax saving bonds:

Tax-free bonds:

Tax-free bonds are issued by a government enterprise to raise funds for a specific purpose. They are a low-risk investment as they offer a fixed interest to the investors.
The main attractive feature is the tax exemption on the investment made as per Section 10 of the Income Tax Act, 1961.
These bonds offer a higher interest rate of interest than tax saving bonds. One can invest up to ₹5 lakhs in tax-free bonds.
The lock-in period for these bonds is long-term. It is generally 10 years or more.
Any investor can buy or sell these bonds on stock exchanges.
The interest earned on tax-free bonds is not taxable. However, any capital gains arising from selling these bonds in the secondary market are taxable.
As these bonds are low-risk investments, they are ideal for senior citizens who look for fixed income.
Investors who fall in the highest tax bracket can also invest in these bonds. Individuals who have a high net worth, HUF members, trusts and qualified investors choose to invest in these bonds.

Tax saving bonds:

Tax saving bonds, on the other hand, provide tax benefits to investors as per Section 80 CCF of the Income Tax Act. The maximum deduction permitted is ₹20,000 per year.
Only the initial investment in these bonds is tax-exempt.
The lock-in period is 5 years or more for these bonds.
The interest earned on tax saving bonds is taxable.
These bonds are ideal for individuals who look for long-term returns. These are not suitable for those who want immediate returns.
Compared to tax-free bonds, tax saving bonds offer a lower interest rate.
These bonds have a buy-back clause. Investors can withdraw their funds after a specific period like five years or more.