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  1. What are Tax Saving Bonds?
  2. Features of Tax Saving Bonds
  3. Who Is Eligible To Invest?
  4. Section 80CCF for Tax Saving Bonds
  5. Frequently Asked Questions

While every taxpayer wants to reduce their tax burden, not every investor is comfortable with the risk associated with other tax saving investment options.  Hence, developed a wide range of investment plans, schemes, bonds, and other products to ensure that even risk-averse investors have different investment options to select from. One such investment option is tax saving bonds.

What are Tax Saving Bonds?

A Government bond is an investment product that offers either a fixed rate of interest or fluctuating interest rate on the investment amount. It may or may not have a lock-in period. 

As the name suggests, tax saving bonds offer tax deductions. The issuer of this bond is the Government of India. The purpose of the tax deductions is to attract more investors to these bonds and aid in funding India’s infrastructure requirements.

Features of Tax Saving Bonds

  1. The interest rate on tax saving bonds varies from 6% to 8% per annum. The current interest rate for GOI Tax Saving Bond is 7.75% per annum.
  2. An investor can opt for a cumulative or non-cumulative interest payout option. Under the cumulative option, the interest is compounded every six months and paid along with the principal amount on maturity. While the non-cumulative option provides an interest payout every 6 months. The interest payout date is usually fixed at the time of the issue of the bond.
  3. The minimum amount of investment is Rs 1,000. No limit on the maximum amount of investment.
  4. Lock-in period is 5 years. An investor can withdraw after the expiry of 5 years or 7 years.
  5. Eligible for a tax deduction.
  6. Interest income is taxable at the slab rate.
  7. Capital gain is applicable on redemption of these bonds at the time of maturity.

Who Is Eligible To Invest?

The following type of investors are eligible for investment:

  • Individual who is a citizen of India. They can invest in their individual capacity, joint ownership, on behalf of a minor.
  • Hindu Undivided Family.
  • A “Charitable Institution” registered under the 25th Section of the Indian Companies Act of 1956.
  • An institution which has obtained a Certificate of Registration as a charitable institution in accordance with a law in force in the Republic of India.

Section 80CCF for Tax Saving Bonds

An investor can claim a tax deduction under section 80CCF against an investment in these bonds. The deduction limit is Rs 20,000. The deduction is available to an individual or Hindu Undivided Family. This deduction is linked to a deduction under section 80C.

Tax Free Bonds

Tax free bonds are issued by Government backed companies. Since the government typically backs the organisations that issue these bonds, the default risk is very low. These bonds typically have maturity periods of 10, 15, or 20 years. Therefore you should only invest in tax-free bonds if you have the means to lock in your money for such an extended period of time. Since there is no maximum investment limit for these bonds, HNIs and institutions find these bonds to be highly attractive.

Difference Between Tax Saving Bonds and Tax Free Bonds

The following table summarizes tax savings bonds vs tax free bond:

ParticularsTax Savings BondsTax Free Bonds
Issued ByGovernment of IndiaGovernment backed organisations
Tax DeductionUp to Rs 20,000 under section 80CCFNo tax deduction
Interest IncomeTaxableExempt under Section 10(15)

Frequently Asked Questions

Who issues Tax Savings bonds? Is payment guaranteed on maturity?

The Government of India issues taxsaving bonds. Yes, the GOI guarantees payment of interest income and maturity value.

Can I use the taxsaving bonds as collateral for obtaining loans?

Yes, you can use the these bonds as collateral for obtaining loans from scheduled banks and financial institutions.

How much tax is applicable on interest income earned from tax saving bonds?

The interest income earned from these bonds is taxable under the head ‘Income From Other Sources’. It is taxable at the applicable slab rate for the financial year.

How can I buy tax saving bonds?

You can buy from all branches of SBI, other nationalised banks, and private banks such as HDFC, ICICI, Kotak bank.

Who should invest in taxsaving bonds?

An investor who is looking for a low risk investment option in exchange for an average 8% interest rate and a deduction benefit must consider investing.

Are tax saving bonds the same as long-term infrastructure bonds?

Yes, these bonds are the same as long-term infrastructure bonds

Is it safe to invest in tax saving bond?

The Government of India issues bonds to raise investment in the economy and funds for public welfare programs. These are typically seen as risk-free investments because the government guarantees their return on investment.