Tax Query: How can I invest in tax-free bonds?

I wish to allocate a portion of my investments in tax-free bonds. How can I invest in tax-free bonds, and what are the tax implications on the returns from the bonds?

A tax-free bond gives you a fixed income over a long tenure of 10-15 years. The interest is on the face value of the bond, paid yearly or half-yearly basis. The tax-free bond issues of various PSUs available are HUDCO, NHAI, REC, PFC and NABARD. The interest income you earn is completely tax exempt. One can also choose a cumulative payout of interest along with the principal upon maturity.

The bonds are available for buying and selling on the stock exchanges through your Demat account. Before investing, you should check for the credit rating of the bond. Most bond issues are having a credit rating of AAA. Also, while investing, you should evaluate the yield to maturity (YTM) on your investment.

The sale of the tax-free bonds gets taxed as capital gains based on the period of holding. In case the bonds are held for a period up to one year, your gains are short-term capital gains taxed as per your income slab rates. In case you sell after holding them for one year, your gains get taxed at 10% and without the benefit of indexation.

Also Read: Tax Query: What is my income tax liability from intraday trading in shares?

For FY 2019-20, I earned income by rendering professional software services as a freelancer and also a partner’s salary from a partnership firm. I have some interest income from my savings bank account too. How can I benefit from the presumptive income scheme?

Under the presumptive income scheme, you can offer up to 50% of your gross receipts as income from your profession. The benefit is available only for certain notified professions which include technical consultancy. You need not maintain books of accounts. You can offer your freelancing income under the presumptive scheme only in the case where your gross receipts are up to Rs 50 lakh in a financial year.

Your income by way of a partner’s salary gets taxed as income from a business. You cannot claim any deduction against the partner’s salary. The interest earned on your savings account gets taxed as other income. You can claim a deduction up to Rs 10,000 in respect of such interest.

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