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  • Interest on Tax Free Bonds

    Tax free bonds have developed as greatly prevalent savings tool among stakeholders thanks to the immense tax benefits offered. There are tax free bonds that keep materializing in the market every now and then and they have managed to catch the eyes of quite a few investors in various ways. One reason why it is so enticing is that the money received here cannot be taxed in their hands. On the other hand, there could be circumstances in which people discover some kind of clandestine taxation that literally crawls into the overall instrument before you know. This could be so as a result of gaining more resources that are earned from the bond and therefore this would have to be taken into consideration in the total working that is being carried out. Here is a look at the matter in detail. These bonds are usually distributed by Government supported bodies and are excused from taxation on the returns made on its interest as specified in the Indian Income Tax (1961). The Central Government, while executing its powers covered under Section 10 (15) (iv) (h) of this Act. The law has approved to issue tax-free, secured, convertible as well as non-convertible bonds. There are quite a few government sector undertakings that makes funds by issuing tax free bonds, namely, HUDCO, IREDA (Indian Renewable Energy Development Agency), IRFC, NHAI, NHPC, NTPC, PFC, REC etc.

    Features of Tax Free Bonds:

    • Term of Tax-free Bonds: You can opt for a 10 years, 15 years or 20 years tenure.
    • These kinds of bonds are is possibly listed on NSE / BSE
    • There is no lock-in period for this.
    • Bonds upon exchange on NSE/ BSE while the option of liquidity is offered.
    • This is usually regarded as safe and secure investment.
    • This could be put together either in Demat or Physical format
    • It is compulsory to hold a PAN Card.

    Tax Free Status:

    When you consider the aspect of taxation exemption for different bonds that are being provided by various organizations, then this is limited to a certain percentage of the returns generated by these bonds. The interest that is amassed on the bonds are completely free from tax and therefore this amount too can be counted as the net tax free income list allowed per earning individual. These tax perks are nevertheless limited to this mode and henceforth it does not go beyond every characteristic of the taxability of these bonds and this is something that has to be taken into consideration by creditors seeking deposit cash into the bonds. And if they hold the bonds until it reaches maturity, then tax will not be imposed on the interest earned.

    Wealth Gains:

    One of the ways in which the bonds holder will make some other kind of regular income is obviously through the capital gains route. The bonds that are delivered to the person are typically viable in the secondary market. This shows that the person will be able to make sure that there is certain element of exchangeability prevalent in their investments. This shows that the instrument is essentially recorded on the stock exchanges so if there is anyone who needs to raise some cash from the instrument they already have, then they may go to the trade and exchange the bonds. When the bonds are traded in this manner, then there is a possibility that the investor might experience either a gain or loss in capital in the procedure. This has to be taken into consideration from the point of view of tax system as it signifies income for the person and this can be taxed.

    Taxability:

    If an individual has certain amount of capital gains for the sole aim then this will have to be presented for tax purpose. By tax exempt, it implies that the proceeds from interest should not be taxed but the other sources of income may not be endowed with the same perk. This is one important point to be remembered. If the person knows that they have a bond that has been traded for a fee that is more than the net expense, then it is definitely a capital gain. The duration of the holding of the tax-free bonds is another aspect that determines the proceeds. Are you planning to go for a small term or long term investment? There is a lesser rate of tax for the long term funds gains and so this is a favorable rate that is lesser than the usual short term rate for which some tax is levied. This is determined at 20 percent even though the advantage of indexation can be obtainable for the person. The increasing cost inflation in the past few years is a respite for those stakeholders who have already retained capital gains. This is not to rule out possibilities of a capital loss, which would be set off against other returns.

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