Tax free bonds

Tax queries 471 views 4 replies

josh

256 Points Joined January 2008

Hi Folks,

I have one query regarding the tax free bonds. Are the interests earned on the bonds are tax free or taxable. For example , if I invest 2 lakhs with an interest of 10% , that roughly comes around 20,000 per year. Is this interest of 20,000 is completely tax free or it will be taxable and what rate ? Whether it makes sense to invest in bank FD or tax free bonds ?

Please help to clarify the above queries. Thanks in advance for your suggestions/advice and your time.

Thanks

Josh

Replies (4)

Arpit Pachisia

734 Points Joined July 2012

Hey Josh,

Interest earned on tax free bonds are totally exempt from any tax liability as the name suggests "TAX FREE BONDS". But there is only one situation where individuals find themselves in a spot where there is an element of taxability that creeps into the entire instrument. This could be on account of the capital gains that are earned on the bonds.

So, no amount of interest on tax free bond is taxable, rather there can be an element of capital gain at the time of sale of the bonds which would be taxable at the specified rate.

Thanking You

Arpit Pachisia

734 Points Joined July 2012

Regarding making of any investment in these securities or bonds or FDs is up to you. If you find something better than this, than go for that, otherwise its also a good option.

josh

256 Points Joined January 2008

Thanks arpit for your response.

Regarding capital gains will be applicable if the bonds are sold within a year and profit(interest earned) made but the bonds are held say for 2-3 years then the capital gains may not be applicable , is my understanding is right ?

Thanks

Josh

Arpit Pachisia

734 Points Joined July 2012

Hey Josh,

The time of the holding of the bonds have to be considered so that it is determined whether the capital gains are short term or long term in nature. There is a lower rate of tax for the long term capital gains and hence this is a beneficial rate that is lower than the short term rate but is still there has to be some tax to be paid. This is calculated at 20 per cent though the benefit of indexation will be available for the individual.

Hopes it clear your doubts. Any other queries are mostly welcome.

Thanking you