Tax Query: What is the tax benefit of investing in GOI bond instead of FD?

I am 45 years old. I have investments in mutual funds and government savings schemes. I am planning to switch some investments from mutual funds to risk-free investments. The bank fixed deposit interest rates are running low. Hence, I am evaluating an investment of Rs 4 lakh in 7.75% Savings (Taxable) Bonds, 2018 as against fixed deposits. Is it tax beneficial to invest in the bonds or fixed deposits? 

Your investment in the 7.75% Savings (Taxable) Bonds entitles you to interest on a half-yearly basis, on 31 January and 31 July. Alternatively, you can opt for compounding of the interest, whereby you will receive the entire interest along with the investment, at maturity. The annual interest received or compounded is taxable as per your income tax slab. In case you are in the highest income slab of 30%, your net of tax income is 5.42%.

In the case of fixed deposits, the current interest rate is 6% p.a. You can also opt for compounding of the interest and receive it with the maturity. Your bank interest also gets taxed as per your income tax slab. If you are in the highest income slab of 30%, your net of tax income is 4.2%.

The interest income from both investments is subject to TDS. Hence, from a tax perspective, you earn a higher return from investment in a 7.75% GOI bond. However, in the case of a senior citizen, the interest from bank FD is eligible for a tax deduction up to Rs 50,000, in which case the FD becomes attractive.

Also Read: Tax Query: Can NRIs deposit in their existing PPF account and claim tax deduction?

I bought a single premium policy seven years ago paying a premium of Rs 35,000. The insurance policy has matured in February 2020, and I received Rs 56,000. The insurance company has not deducted tax on the payment. I wish to reinvest the amount for five years. I want to know my income tax liability on maturity and reinvest for the future?

Your income from maturity of the policy is Rs 21,000 (Rs 56,000 – Rs 35,000) gets taxed as income from other sources. You should disclose the income while filing your income tax return due in July 2021 (corresponding to FY 2019-20). Your tax liability will depend on your income tax slab. For example, if you are in the 20% slab, you have to pay 20.8% (inclusive of cess) on the income. You can reinvest the net amount in a five-year bank fixed deposit which will also be eligible for a tax deduction for tax saving investments.

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

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