Taxability of tax saving bonds
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
24 June 2010
I have purchased tax saving bonds in 2007. It has matured now. Kindly let me know what will be the tax implication for the same?
24 June 2010
Principal amount would be exempt and only interest will be taxed. Interest only taxable to the amount not taxed in earlier years.
Querist : Anonymous
Querist :
Anonymous
(Querist)
30 June 2010
Hi, I heard REC bonds are taxable on both the interest earned and maturity value.
Kindly let me know the correct taxability of 'capital gains tax saving bonds'.
Will they be considered as long-term capital gains upon maturity and taxed as per indexation benefit?
Kindly let me know the correct taxability of 'capital gains tax saving bonds'.
Will they be considered as long-term capital gains upon maturity and taxed as per indexation benefit?
26 July 2025
Great question! Here’s a clear explanation of the **taxability of tax-saving bonds** (like REC bonds) on maturity:
---
### 1. **Principal Amount**
* The **principal amount** invested in tax-saving bonds (like under Section 54EC bonds) is **not taxable** on maturity.
* These bonds are specifically issued to save capital gains tax, so the invested amount is exempt from tax.
### 2. **Interest on Bonds**
* The **interest earned** on these bonds is **fully taxable** as income under the head **"Income from Other Sources."**
* It does **not get capital gains treatment**. Interest income is taxed at your applicable slab rate.
### 3. **Capital Gains on Maturity**
* On maturity, **there is no capital gain or loss on the principal amount** because the bonds are **redeemed at par** and the capital invested is exempt.
* If you have purchased tax-saving bonds (Section 54EC), they are **not treated as a capital asset** for capital gains purpose upon maturity. So, **no capital gains tax applies**.
---
### Specific Clarifications on REC Bonds:
* REC bonds often have interest payout (cumulative or non-cumulative).
* Interest is **taxable** even if you do not receive it annually (in case of cumulative bonds, interest accrues and is taxable on accrual basis).
* Maturity value = Principal + accrued interest. **Only interest portion is taxable**, principal is exempt.
---
### Summary:
| Component | Tax Treatment |
| ------------------------- | ---------------------------------- |
| Principal Amount | Exempt from tax |
| Interest Income | Fully taxable under "Other Income" |
| Capital Gains on Maturity | No capital gains tax applies |
---
If you want, I can also help with examples of **how to declare interest income in your return** or **tax planning around these bonds**. Would that help?
---
### 1. **Principal Amount**
* The **principal amount** invested in tax-saving bonds (like under Section 54EC bonds) is **not taxable** on maturity.
* These bonds are specifically issued to save capital gains tax, so the invested amount is exempt from tax.
### 2. **Interest on Bonds**
* The **interest earned** on these bonds is **fully taxable** as income under the head **"Income from Other Sources."**
* It does **not get capital gains treatment**. Interest income is taxed at your applicable slab rate.
### 3. **Capital Gains on Maturity**
* On maturity, **there is no capital gain or loss on the principal amount** because the bonds are **redeemed at par** and the capital invested is exempt.
* If you have purchased tax-saving bonds (Section 54EC), they are **not treated as a capital asset** for capital gains purpose upon maturity. So, **no capital gains tax applies**.
---
### Specific Clarifications on REC Bonds:
* REC bonds often have interest payout (cumulative or non-cumulative).
* Interest is **taxable** even if you do not receive it annually (in case of cumulative bonds, interest accrues and is taxable on accrual basis).
* Maturity value = Principal + accrued interest. **Only interest portion is taxable**, principal is exempt.
---
### Summary:
| Component | Tax Treatment |
| ------------------------- | ---------------------------------- |
| Principal Amount | Exempt from tax |
| Interest Income | Fully taxable under "Other Income" |
| Capital Gains on Maturity | No capital gains tax applies |
---
If you want, I can also help with examples of **how to declare interest income in your return** or **tax planning around these bonds**. Would that help?
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