This requires the investor to bring various instruments with different tax treatments. For example the Tata Capital Non convertible debenture issue that recently closed offered 12 per cent returns for an annual option but this was taxable. If a tax-free investment has to be compared to this then, both have to be brought to the same level.
Another aspect is the provision of tax deduction at source (TDS). Senior citizens, who do not have to pay any tax, find themselves inconvenienced by the TDS provisions, as they have to wait for a long time to get the deducted money back.
So the facility of no TDS eases the process of tax filing for them. Even for normal investors, the absence of the TDS element ensures that there are fewer administrative hassles involved at the time of filing the income tax return.
However, it is important for the investor to remember that if there isn't any TDS, it does not mean that there is no taxation on these investments.
Let's look at a few instruments where the TDS is not applicable:
Recurring deposit: In these deposits, an investor puts a specified sum of money for a number of months and years. The rate of return is pre-decided on such deposits. At the end of the term, the bank pays back the entire accumulated sum.
Investors looking at this option will benefit on the TDS front. Unlike a normal fixed deposit made with the same bank where there would be the TDS when income exceeds a specific limit (Rs 10,000), no amount is deducted from the interest earned here. The interest earned through such recurring deposits however remains taxable.
National Savings Certificate (NSC): There is a very popular route available for investments in the debt arena. Also, investments in NSC get tax benefits under Section 80C.
NSC is a six-year instrument where the investor is able to earn a cumulative return. The interest is compounded half-yearly and the rate works out to 8.16 per cent.
When the investment is large, the accumulation would also increase substantially because of the compounding effect.
Like many other forms of investment, this should also be subject to TDS, but the presence of a separate provision ensures that there isn't any TDS in this instrument. The investor gets the entire sum in his hands. Of course, the income earned is taxable. And the investor has to show each years accumulated income as income from other sources.
Post office deposits: A similar benefit is available for the investor when they consider many options available to them from the post office. This includes post office time deposits as well as post office recurring deposits. Here unlike a normal bank, where TDS is imposed on the time deposits, there is no such provision present for the time deposits.
In terms of the taxation, both incomes will be taxed in the hands of the investor. Even the monthly income scheme that is present from the post office will not have a TDS. Overall, it means a favourable situation for the investors, where they are spared of the entire issue of keep track of the net income and collecting the tax certificates.
Zero coupon bonds: Several zero coupon bonds also have the benefit of no TDS. Zero coupon bonds involve issuance of the bonds at a discount to the face value. These bonds are redeemed at face value. Usually the time period for these bonds is 10, 15 or even 20 years and hence, there is a large accumulation in the instrument.
An example of this is Bhavishya Nirman Bonds that are issued by NABARD. For bonds issued after June 1, 2005 by any infrastructure company or capital fund or a public sector company, there isnt any TDS.
The writer is a certified financial planner.
