Investing in bonds? What about tax?

Many people invest in deposits and bonds with a view to saving taxes. So what tax-saving bonds are available? What are the benefits to investors? Read on to find out. . .

What are the tax implications of investing in deposits and bonds like 8% Savings (Taxable) Bonds, 2003?

Interest income on fixed deposits and bonds like 8% Savings (Taxable) Bonds, 2003, is taxable under the head 'Income from other Sources'. The income received is taxable.

However, an assessee can claim direct expenses incurred to earn that income under provisions of Section 57(iii).

Can investors claim any tax benefits on amount invested (Section 88) or the interest income (Section 80L)?

Investments made in fixed deposits and bonds are not eligible for any deduction under Section 88. Under Section 80L only interest income from the following can be claimed as a deduction up to the extent provided in the Finance Act of the respective year. These heads are as under:

Incomes in respect of bonds and deposits qualifying for deduction are:

• Interest on Government Securities, interest on National Savings Certificate VI, VII and VIII issue, Development Bonds & 7 year National Rural Development Bonds.
• Interest on Post Office Time Deposit Accounts, the Post Office Recurring Deposit Accounts, and National Savings Scheme referred to in National Savings Scheme Rules, 1992.
• Dividends received from any co-operative society.
• Income in respect of units of the Unit Trust of India (up to assessment year 1999-2000).
• Interest on deposits with a banking company and a co-operative bank.
• Interest on deposits with a co-operative society made by a member of the society.
• Interest on deposits with housing boards. Interest from deposits made under A.E. (C, D.) Act & C.D.S. (I.T.P.) Act.
• Interest on notified debentures of any co-operative society, any institution or any public sector company.
• Interest on deposits with a financial corporation which is engaged in providing long-term finance for industrial development in India and which is eligible for deduction under Section 36(l)(viii) [up to assessment year 1999-2000, the corporation is approved by Central Government].
• Interest on deposits with a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under Section 36(l)(viii) [up to assessment year 1999-2000, the company is approved by the Central Government under Section 36(l)(viii)].
• Interest on deposits with Industrial Development Bank of India.
• Interest on deposits under National Deposit Scheme. Income in respect of units of mutual fund specified under Section 10(23D) [up to assess. year 1999-00].
• Interest on deposits under Post Office (Monthly Income Account) Rules.

Are senior citizens eligible for any additional tax benefits?

No, the Income Tax Act provides for the same benefits to all individuals. However certain fixed deposit schemes and bonds may provide higher interest rates for investments made by senior citizens.

Table 1 : Limits for Deduction

*Interest on security of the Central/State Govt. [vide proviso
to Section 80L(1)]

Are investments made in these instruments subject to tax deducted at source (TDS)? What is the limit below which TDS is not applicable?

Yes, if the interest from such investments exceeds Rs 5,000 in a financial year then TDS is applicable.

Can investors avoid TDS; if yes what documents are required to be provided for the same? Investors can avoid TDS by presenting form 15H, which states that the person does not have a taxable income.

If the bank deducts tax at source, how should an investor claim the benefit?

The assessee has to file a return of income every year declaring his total income and the tax payable thereon. He can furnish the TDS certificate with the return filed and the tax payable would reduce accordingly. If additional tax has been paid, then the excess amount will be refunded to him by tax authorities.

What are capital gains savings bonds & what benefits do they offer?

Capital gains savings bonds are those issued by the following institutions: NABARD, NHAI, REC, NHB & SIDBI.

Investors should ensure that these bonds are not transferred or converted within a period of 3 years from the date of acquisition. In such an event gains would be taxable.

When a property is sold and a long-term capital gains liability arises, the assessee has an option to avoid it by investing the capital gains in another property within the specified time duration.

Another option available to him to avoid paying tax is by investing the requisite sum in capital gains bonds within a period of 6 months from date of transfer.

These bonds have to be held for a period of 3 years and no loan, mortgage or any encumbrances should be created on these bonds. However the interest on these bonds is taxable.

This article forms a part of the latest issue of Money Simplified - The Definitive Guide to Tax Panning. Click here to download, for FREE, the complete guide.