Tax Saving Bonds

Tax-saving bonds are great instruments offered by the government to help people save tax. These are special documents which offer tax benefits to the owners as permitted under the Income Tax Act. These bond have a lock-in period of 5 years.

India, the largest democracy in the world runs on the tax paid by millions of its citizens, which each Rupee paid as tax helping the country grow and prosper. Paying income tax is the duty and responsibility of every eligible taxpayer and the country has over 35 million taxpayers, accounting for hundreds of crores. While for some tax is just another source of expenditure, for others it could have a huge bearing on their life. The government, on its part has a number of schemes to ensure that taxes don’t overburden citizens, with tax savings bonds being one of the popular means to save tax.

What are Tax Saving Bonds?

A bond, in simple terms is a document which promises the holder certain rewards and benefits in return for an investment. It consists of an Issuer, the agency which provides these bonds and an owner, the person under whose name such bonds exists. Tax Saving Bonds, as the name indicates are bonds which help people save tax. These bonds offer certain special tax benefits to owners, helping them save a certain portion of their overall tax. Individuals can purchase these bonds and earn a certain interest on them, with a special provision in the Income Tax Act providing tax benefits on investments. Tax Saving Bonds come with a minimum lock-in period of 5 years, making them mid to long term investment tools.

While not as attractive as other investment options, tax savings bonds offer decent returns minus the risk which is generally associated with other instruments, making them ideal for members of the society who wish to save money without risking it. Individuals who are looking for long term returns rather than immediate ones can opt for tax saving bonds.

There are a number of tax saving bonds one can choose from, each unique in their own way. Some of the popular tax saving bonds are mentioned below.

Infrastructure Bonds: Infrastructure bonds are offered by multiple banks in the country, with the investment used to develop and enhance the infrastructure of the nation. Some of the most invested infrastructure bonds were offered by ICICI bank and HDFC bank. These bonds were easy to purchase and offered tax benefits under Section 80CCF to investors, making them ideal for thousands of them. These bonds earned an interest of about 8-9% per annum, making them medium growth investment options.

There were a number of other bonds issued during the year, but these were categorised as tax free bonds, offering the benefit of no tax on the interest earned. Some of the popular tax free bonds were RBI Relief Bonds, NHAI Bonds, HUDCO Bonds, NTPC Bonds and IRFC Bonds.

Section 80CCF

Tax saving bonds enjoy special privileges under Section 80CCF of the Income Tax Act which states that individuals enjoy tax deductions up to Rs 20,000 on the bonds owned by them. This means that an investor in these bonds can reduce his taxable income by Rs 20,000 in a year, thereby saving on the overall tax he/she might have otherwise had to pay. This deduction is excluding the Rs 1.5 lakh provided under Section 80C of the Act.

Example: Mr. Kumar, aged 35 has an annual income of Rs 4.8 lakh, putting him in the 10% income tax slab. To reduce the impact of tax and to have an investment for the future, he decided to purchase tax saving bonds from a local bank. He purchases bonds worth Rs 40,000 with a lock in period of 5 years. Mr. Kumar is now eligible for a tax deduction of Rs 20,000 under Section 80CCF of the Income Tax Act. As there are no other investments which are eligible for deduction, his taxable income becomes Rs (2.3 lakh minus Rs 20,000), i.e., Rs 2.1 lakh. This reduction helps him save considerable amounts on tax every year he invests in bonds.

Differences between Tax Saving Bonds & Tax Free Bonds

Apart from Tax Saving Bonds, another popular alternative is Tax Free Bonds, which in essence are bonds which are tax free. It is possible for the uninitiated to get confused between these two, but there are a few differences which set them apart.

  Tax Free Bond Tax Saving Bond


Bonds which do not attract tax on interest earned are termed tax free bonds

Tax Saving Bonds attract taxes but the investment is eligible for tax deductions

Income Tax Sections

Not eligible for deductions under Section 80C of the Income Tax Act

Provision for deduction under Section 80CCF is provided


Interest is not taxed by the government

Interest earned is taxable by the government

Deduction permitted


Maximum of Rs 20,000 per year

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