Capital Gains Bonds

Deep Discount Bonds

Deep discount Bonds were issued by IDBI, Small industries Development Bank of India (SIDBI), SCICI ltd., Krishna Bhagya Jala Nigam Ltd and many more. In the present day the investment in Deep Discount Bonds has lost its charm because the Government has clarified that the deemed interest for each year would be liable to tax.

Capital Gains Bonds

These bonds are issued by selected organization in terms of section 54EC of the Income Tax act 1961. The interest rate of these bonds is very low. Presently the interest is in between 5% to 5.5%p.a. But the interest earned by these bonds is taxable. Presently these Bonds are issued by NHAI and REC. The investor must read terms and condition before making investment. 

The maximum investment limits per person is RS50 lakh only. Generally the duration of these Bonds are 60 months. Early redemption are allowed but after 36 months. The investor has to exercise the put option not later than 3 months prior to the end of 36 months from the deemed date of allotment ie during the 33rd month from the deemed date of allotment would be different for five years and three years.

These Bonds are not transferable, non-negotiable and cannot be offered as security for any loan or advance. No tax is deducted at source on the interest on these Bonds. In sprite of the fact that the interest rate on these bonds is very low, those investor s who derive long term capital gains find it as a very ideal instrument of investment to save tax arising the gains in respect of short term capital gains. These Bonds are not recommended for persons having no long term capital gains.

Type of Bonds-2

NRI Bonds 

From time to time the Government generally through the state Bank of India issues special Bonds which is popularly known as NRI Bonds. Mostly these Bonds are Tax-free Bonds. There is no wealth tax on these bonds so they are also gift tax free. India development Bonds, Resurgent India Bonds are some of the examples of NRI Bonds. These Bonds are generally designated in US Dollars and are issued to attract NRI’s settles at abroad. Presently the investments in these bonds are not available because they are not for sale now. 

Tax free Bonds of Public Sector 

A large number of public sector undertakings are now-a-days issuing tax-free Bonds. The special features of these Bonds are tax free irrespective of income.Investment in these bonds is quite lucrative. The bonds bear prevailing interest rate almost equal to Reserve bank’s tax free bonds. Before making investment in these a deep study of their interest rate is very important. 

Benefit of Tax free Bonds of Public Sector

• Easy Transferable 

• Can be easily sell in open market 

• There is no wealth tax 

• Effective investment plan for whom belongs to high income bracket 

Taxable Bonds of private Sector

Like tax free bonds issued by the public sector is a separate series of public sector taxable bonds. These bonds generally bear an interest of 6% to 9% p.a

Types of Bonds

Types of Bonds

• RBI Relief Bonds
• Saving Bonds Of Reserve Bank
• NRI Bonds
• Tax free Bonds of Public Sector
• Taxable Bonds Of private Sector
• Deep discount Bonds
• Capital Gains Bonds

RBI Relief Bonds

The RBI has stopped the issue of these Bonds with effect from 1.3.2003. Investment in Relief Bonds was particularly suitable for persons who are in the highest income bracket. The main reason why the investment was lucrative is that the entire interest income from the Relief Bond is completely exempt from income tax. 

Earlier Relief Bonds bearing interest of 10%, 9%,8.5% and 7% p.a were issued. The lock in period of these Bonds ,popularly known as Rahat patras, is five years. Besides , there is no wealth tax on an unlimited amount of these bonds. If the Bonds are sold before maturity then while computing the long term capital gain/loss the cost Inflation Index cannot be applied .

Saving Bonds Of Reserve bank

The Reserve bank of India has issued two new types of Bonds . These Bondds are known as 6.5% (Tax exempt)savings Bonds and 8% (Taxable)savings Bonds. The interest income from tax-free Bonds was completely exempt from would be liable to tax on the same with no exemption or deduction of income tax act under section 10. 

The investment in 6.5% saving Bonds, 2003 , Have been suspended with effect from 2004, hence presently the investment in tax free bonds of RBI cannot be made. However , do continue to watch details in the newspaper about new tax free Bonds which may be issued in future.

Now TDS @ 10% with applicable surcharge as well as education cesses would be applicable on interest in excess of RS 10,000 p.a from the taxable savings Bonds issued by the Reserve Bank of India