Tax Free.!! These two words are enough to bring someone’s attention. And these days the market is overwhelmed with various Tax Free Secured and Non-Convertible Bonds which offer you tax free payouts at regular intervals. If I am not wrong, you might be one of those recipients who have been receiving various promotional Emails, SMSs to grab such Bonds. Have you subscribed one or planning to go for it? Is the tax free payout headline is enough to make you convinced to take a decision for a long term call or do you need to look other aspects as well? Let’s have a deep dive into it.
One of these currently running bonds; HUDCO Tax free bonds (issue closing date 14th October) which offer 8.39% coupon rate for 10 years bonds & 8.76%, 8.74% coupon rate for 15 years & 20 years respectively. PFC Tax Free Bonds Tranche -1 is going to be opened on 14th October (issue closing date 11th October). This is offering 8.43% coupon rate for 10 years bonds and at the same time 15 years & 20 years of these bonds are offering at 8.79% & 8.92% coupon rate respectively. Please note these rates are offered to retail investors applying for amount aggregating Upto Rs.10lacs. There is no lock-in period with these tax-free bonds. If you subscribe to these bonds in demat form, you can sell them anytime you want after their listing on the stock exchange.
Any investor’s prime concern before investment is, its tax implications rather than returns. Though such bonds offer you tax free returns, but don’t you want to look from other angles where it might get taxed? This may be in the form of tax on the Capital gains, TDS, Tax on Gift, wealth tax etc.
As per section 10(15)(iv), Interest from Tax free Bonds are exempted from Income Tax. Since the interest Income on these bonds is exempt, no Tax Deduction at Source is required. However interest on application money would be liable for TDS as well as taxed as per present tax laws.
Tax on Short Term & Long Term Capital Gains:
Short term capital gains on the transfer/sale of listed bonds, where bonds are held for a period of less than 12 months would be taxed at per normal tax rate. For eg: if you are in 30% bracket then you are liable to pay tax at a rate of 30% plus applicable education cess on the gains arise out of transfer/sale of these bonds within 12 months from the date of its allotment.
Under Section 2 (29A) of the I.T. Act, read with section 2 (42A) of the I.T. Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under Section 112 of the I.T. Act, capital gains arising on the transfer of long term capital assets being listed securities are subject to tax at the rate of 20% of capital gains calculated after reducing indexed cost of acquisition or 10% of capital gains without indexation of the cost of acquisition.
However as per third proviso to Section 48 of Income Tax Act, 1961 benefits of indexation of cost of acquisition under second proviso of Section 48 of Income Tax Act, 1961 is not available in case of bonds and debenture, except capital indexed bonds. Thus, long term capital gain tax can be considered at a rate of 10% on listed bonds without indexation.
Note: STT (Securities Transaction Tax) is not applicable on transactions in the Bonds. In case the Bonds are held as stock in trade, the income on transfer of bonds would be taxed as business income or loss in accordance with and subject to the provisions of the I.T. Act
Save LTCG Tax through investment into Bonds notified u/s 54EC:
Tax on Long Term Capital Gains (LTCG) arising from the transfer/sale of these bonds can be exempted to the bondholders to the extent such capital gains are invested in certain notified bonds under section 54EC within six months from the date of transfer. But if only part of the capital gain is so invested, the exemption shall be proportionately reduced. However, if the said notified bonds are transferred or converted into money within a period of three years from their date of acquisition, the amount of capital gains exempted earlier would become chargeable to tax as long term capital gains in the year in which the bonds are transferred or converted into money.
Save Tax on LTCG Under Section 54F:
Section 54F is available to all those assets other than residential houses properties (available to person who is an individual or HUF). So for claiming long term capital gains arising to Bondholder, this section is utilized. As per section this section under the Income Tax Act, 1961; tax on LTCG from the transfer/sale of these bonds will not be chargeable if the entire net sales considerations is utilized purchase of a new residential house within a period of one year before, or two years after the date of transfer/sale. The sale consideration can also be utilised to save taxes within a period of 3 years in construction of residential house.
Do note, if part of such net sales consideration is invested within the prescribed period in a residential house, then such gains would be chargeable to tax on a proportionate basis. The other condition is that that the said bondholder should not own more than one residential house other than the new asset, on the date of such transfer or purchase any residential house, other than the new asset, within a period of one year after the date of such transfer of construct any residential house, other than the new asset, within a period of three years after the date of such transfer on which the income is chargeable under ” Income from House Property “.
If the residential house in which the investment has been made is transferred/sold within a period of three years from the date of its purchase or construction, the amount of capital gains tax exempted earlier would become chargeable to tax as long term capital gains in the year in which such residential house is transferred. Even if the Bondholder constructs/purchase within a period of three years after the date of transfer of capital asset, another residential house (other than the new residential house referred above), then the original exemption will be taxed as capital gains in the year in which the additional residential house is acquired.
Wealth tax is not applicable to the Holders of these Bonds:
Wealth-tax is not levied on investment in bond under section 2(ea) of the Wealth-tax Act, 1957.
Taxation on Gift:
As per section 56(2)(vii) (c) of the I.T. Act, in case where individual or Hindu undivided Family receives bond from any person on or after 1st October, 2009
A. without any consideration, aggregate fair market value of which exceeds fifty thousand rupees, then the whole of the aggregate fair market value of such bonds/debentures or;
B. for a consideration which is less than the aggregate fair market value of the Bond by an amount exceeding fifty thousand rupees, then the aggregate fair market value of such property as exceeds such consideration; shall be taxable as the income of the recipient.
Provided further that this clause shall not apply to any sum of money or any property received
1. from any relative; or
2. on the occasion of the marriage of the individual; or
3. under a will or by way of inheritance; or
4. in contemplation of death of the payer or donor, as the case may be; or
5. from any local authority as defined in the Explanation to clause (20) of section 10; or
6. from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or
7. from any trust or institution registered under section 12AA.
You might want to read: Know the tax liabilities on the Gifts you receive from your Near & Dear
These are not the Bonds to claim Tax Exemption u/s 80CCF:
Remember! These Tax Free Bonds are not Tax Savings Bonds under section 80CCF. Tax Free Bonds do not provide any tax deduction. In Union Budget 2010-2011, a new section 80CCF was inserted under the Income Tax Act, 1961, to provide for income tax deductions for subscription to long-term infrastructure bonds. These long term infrastructure bonds offered an additional window of tax deduction of investments up to Rs. 20,000. But such Tax Saving Bonds are not available from financial year 2012-13 as the exemption was withheld by in Budget 2012.