Tax Free Bonds




Tax Benefits

1. The income by way of interest on these Bonds shall not form part of total income as per provisions under section 10 (15) (iv) (h) of I.T. Act, 1961;

2. There shall be no deduction of tax at source from the interest, which accrues to the bondholders;

3. As per provisions under section 2 (29A) of the I.T. Act, read with section 2 (42A) of the I.T. Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under section 112 of the I.T. Act, capital gains arising on the transfer of long term capital assets being listed securities are subject to tax at the rate of 20% of capital gains calculated after reducing indexed cost of acquisition or 10% of capital gains without indexation of the cost of acquisition;

4. Wealth Taxis not levied on investment in Bond under section 2(ea) of the Wealth-tax Act, 1957


Important FAQ

·         Is there a lock-in period for these bonds?

No, these bonds do not have any lock-in period. The bonds would be traded onto recognised stock exchange and thus can be purchased and sold at the prevailing market prices on the exchange. If one wishes to hold until maturity, then the redemption would be made by the issuer.

·         Is interest on these bonds Tax Free?

Yes, the interest which one will earn would be exempt from tax.

·         Will TDS be deducted from the interest payment?

These bonds are tax free and hence not subject to TDS.

·         Is demat account mandatory to invest in tax free bonds?

The bonds can be held either in demat or physical form. But if one wish to trade onto the exchange, then it can happen only via demat mode.

·         Are investments in these bonds eligible for deduction u/s 80C?

The sum invested in these bonds is not eligible for any deduction under section 80C, 80CCF or 54EC. Hence, no deduction benefit is avail while one invests money into these bonds. However, as mentioned earlier the interest which you enjoy will be fully exempt from tax, and therefore no TDS will apply as well. However, capital gains on these bonds are taxable like normal corporate bonds.

Thus, if the bonds are sold within one year of the date of purchase, the short-term capital gains arising would be subject to tax at slab rates. Similarly, if the capital gains are made after a holding period of one year, long term capital gains will be applicable at 20% with indexation benefit or 10% without any indexation benefit.

·         Can a minor apply to these bonds?

Yes, a minor can apply for these bonds, but only and only through a guardian.

·         Can one apply in joint names?

Yes, one may apply in a joint name. However, the demat account will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account. Moreover, all payments will be made out in favour of the first applicant as well as all communications will be addressed to the first named applicant whose name appears in the application form and at the address mentioned therein.

·         Who will get the interest in case of joint application?

In case of joint application, interest will be accounted to the first holder only.

·         My demat account is in joint name, but I want to apply is a single name?

In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.

·         If I’m an NRI can I invest in these bonds?

Yes, NRIs are eligible to invest in these bonds but some companies are not allowing NRI to invest 

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