As we approach the end of another financial year, the interest in different tax-saving instruments is on the rise. While there are various instruments to save tax and invest safely, one important arena to focus on is Government Bonds. Whether it is having a safe savings and investment options or tax savings Capital Gains funds, there are several schemes and bonds that you can invest in.
Government Bonds: A Safe Haven for Investors
Government bonds have been serving Indian citizens as well as Hindu Undivided Families (HUFs) in various forms for a long time. When it comes to saving taxes, there are two main types of government bonds that are preferred by different people, tax-free bonds and tax-saving bonds.
Tax-Free Bonds vs Tax-Saving Bonds
Understanding the difference between these two types of bonds is important to make the right choice as per our needs. The main difference between the tax-free bonds and tax-saving bonds are in tax exemptions that the investments in these instruments receive. Bonds can be taxed in three stages, in the first stage (investment), while earning the interest and at maturity or on receiving the last returns. Based on the taxes exempted or applied in these stages, the bonds are easily clarified as tax-free or tax-saving.
If the investment made and the end returns on a bond are not taxed but the interest earned in taxed, it falls under the tax-free scheme. However, there are bonds whose end returns are taxed but in turn offer tax exemptions from paying Income Tax under Section 80CCF; these bonds are known as tax-saving bonds.
Top Government Bonds for Tax Savings
Here are some of the best government bonds that will help you save taxes in one way or another.
1. 7.75% GOI Savings Bond
The 7.75% GOI Savings Bond is a newly introduced savings scheme that is replacing the famous 8% Savings Bond. The seven-year bond is replacing the popular 8% bonds and will be available from January 10, 2018. This government bond offers a higher rate of return than fixed deposits and even though the interest earned in the bonds is taxable, the bonds will be exempt from wealth tax under the Wealth Tax Act, 1957. These bonds are available at the face value of Rs 1000 and the return on investment at the end of 7 years will be Rs 1,703.
2. Sovereign Gold Bond (SGB)
Sovereign Gold Bond (SGB) was introduced by the government in 2015 with an aim of curbing the demand for physical gold. SGBs are a smart way of investing in gold for a long period of time. Investing in jewellery, gold bars and coins as well as gold Exchange-traded fund (ETFs) come at a transactional cost. While the cost ranges from 25-30% for gold jewellery to 13-15% in case of Gold bars and coins. However, the transaction cost for SGBs are negligible and the interest earned on the investments are free of income tax. The SGBs offer a fixed interest rate of 2.5% and these bonds can be used as collateral for loans.
3. Capital Gains Bonds by NHAI & REC
Capital gains bonds by NHAI and REC help people to save the tax paid on the sale of a long-term capital asset. The Capital Gains Tax is levied on the sale of long-term assets and can be saved if the funds are invested in the Capital Gains Bonds as mentioned under section 54EC within six months of the date of sale. The NHAI and REC Capital Gains Bonds have been known as a favourite in this section and have a face value of Rs 10000. These bonds have an interest rate of 5.25 % which is paid annually and the maximum amounts that can be invested in these bonds have been capped at Rs 50, 00,000. Being an AAA rated bonds, the Capital Gains Bonds by NHAI & REC are extremely stable and a great option to invest your excess funds from the sale of assets.
4. Indian Railways Finance Corporation (IRFC) Tax-free bonds
The Indian Railways Finance Corporation (IRFC) tax-free bonds offer up to 8% of tax-free returns. The IRFC tax-free bonds were issued for a face value of Rs 1000 and are available in two series, series-80 (10 years) and series 80A (15 years). The interest earned on IRFC bonds are tax-free and were issued in October 2012. These tax-free bonds are in the nature of Secured Redeemable Non-convertible Debentures. These bonds can be bought in the secondary markets to earn easy tax-free income in the form of interest.
The biggest advantage of choosing government bonds as investments is that they are considerably risk-free. All these bonds can either be subscribed directly from the government during the subscription period, or traded in the government securities market via a demat account. The government bonds are available both in individual prospect as well as clubbed mutual funds. While the best way to redeem these bonds for their maximum returns is to earn the interest and wait till the maturity of the bonds, they can also be sold off in the market at an earlier stage. The tax benefits, returns and the security provided by these government bonds make it one of the most attractive arrays for investors.
This article is intended for general information purposes only and should not be construed as investment advice. You should separately obtain independent advice when making decisions in these areas.