Tax Saving Bonds in India

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In India the tax saving bonds are used by the individual tax payers. These have not been too popular like some other tax saving instruments but are deemed ideal for tax payers who have lesser propensity to take risks. These bonds are for investors who look to generate savings in the long run and also enjoy tax benefits at the same time.

The tax-saving bonds are not inflation adjusted - the interest rates of these investment options stay the same in spite of fluctuating inflation rates. This has contributed significantly to their lesser popularity.

These bonds are financially viable if the inflation is on the lower side. However, if the inflation reaches double digits these investments could become counter-productive and also reduce the investors' financial worth.

Tax Deducting Sections

In India, the following sections of the Income Tax Act of 1961 state the exemptions and benefits that are to be provided to the tax saving bonds:

  • 80C
  • 80CCF
  • 80CCC
  • 54EC
  • 80CCD

Section 80CCF

The Section 80CCF was introduced in the Union Budget for 2010-11. It is supposed to provide deductions in income tax for investments in long term infrastructure bonds. In 2010-11 these bonds provided the scope for additional income tax deductions till INR 20 thousand. This amount has been increased in the 2011-12 budget as well. This additional amount is above and over the tax exemption limit of 1 lakh rupees provided under 80C, 80CCD, and 80CCC.

RBI Relief Bonds

The minimum investment limit for these bonds, issued by the RBI, is INR 1000 and the interest of these bonds is compounded every 6 months. These bonds have a maturity period of 5 years and the interest earned on these bonds is tax free.

The holders of these bonds can opt to either receive the interest every 6 months or after maturity. The half yearly RBI bonds are preferred by investors who want a consistent and fixed income. The fact that RBI is the apex banking institute in India makes these bonds a safe investment option.

IDFC Infrastructure Bonds

Each IDFC infrastructure bond has a face value of 5000 rupees and the minimum investment limit is INR 10 thousand. Interest can be received after maturity or on an annual basis. These bonds have a minimum lock-in period of 5 years and they mature after 10 years.

Infrastructure Bonds

Infrastructure bonds provided by leading private sector banks such as ICICI are extremely popular among investors. L&T Infrastructure Finance Company is supposed to come out with the L&T Infra's Long Term Infrastructure Bonds. These bonds will be providing tax benefits as stated in the Section 80CCF of the Income Tax Act 1961. Similar tax benefits are also provided by LIC Infrastructure Bonds.

NHAI/REC Bonds

The NHAI/REC bonds offer tax benefits as stated under the Section 54EC of the Income Tax Act of 1961. Tax payers can save taxes if they invest capital gain derived from transferring a long term capital asset in REC or NHAI bonds.

These bonds provide yearly interest payments and their maturity period is 3 years. Its minimum investment limit is 10,000 rupees.



Last Updated on June 20, 2015
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