Are tax-saving infrastructure bonds tax-free? See how they are taxed

Tax-saving infrastructure bonds are issued by the government and enjoy a deduction of Rs.20,000 under Section 80CCF of the Income Tax Act. The scheme for the issuance of tax-saving bonds was first formulated in 2010 and was brought into force in 2011. All the tax-saving infrastructure bonds issued in 2011-12 would mature in the current financial year 2021-22. 

Tax-saving bonds offer a tax benefit by way of deduction; however, the interest from these bonds becomes taxable in the hands of the investors. So, it should be noted that the tax-saving bonds are not tax-free bonds which means that the income earned from these bonds is subject to tax. 

These bonds offer two options for interest payout: (i) Annual interest payout option and (ii) Cumulative interest option. 

The investors selecting annual interest would have paid tax on the interest income earned every year on these bonds. However, the investors who opted for the cumulative option probably would have to pay more tax on the interest than the tax they saved in the investment year under Section 80CCF. 

Taxation on the interest earned from tax-saving bonds

Regarding tax implications, whether the interest on the long-term infrastructure bond is made annually or at the end of maturity (cumulative), it gets added to the investor’s taxable income and taxed according to the investor’s slab rate. 

The tax payable for investors falling under lower slab rates will be less, and those falling under higher tax brackets will be higher.  

Tax Deducted at Source (TDS)

The resident investors who select the cumulative interest option will have a TDS deduction of 10% if their income is more than Rs.5000. However, if the investor does not have a valid PAN or fails to provide the PAN number, the TDS rate will increase to 20%. 

Also, the TDS would be deducted at 20% if the investor has not filed his income tax return for the last two years; however, the aggregate of TDS and TCS is equal to or more than Rs.50,000. 

Investors holding the bonds in Demat form will not be liable to TDS. 

The non-resident taxpayers will have a TDS of 30% plus applicable cess from the interest income. 

Save yourself from tax deduction

Resident investors can get relief from a tax deduction by submitting Form 15G and Form 15H (for senior citizens).  These forms are eligible only if the income of the investor is less than the basic exemption limit.

For others, If you have not yet updated the PAN, you should update it on priority with your respective registrar and transfer agents (RTAs). 

Also, non-resident investors must submit tax officers orders under Section 195/ 197 specifying ‘nil’ or ‘lower rate’ of tax deduction within the provided to their RTAs. 

For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in