Taxability of tax saving bonds
Querist : Anonymous
Querist : Anonymous
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?
---
### 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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