During the tax season, the majority of people seek investment opportunities in order to claim tax benefits. From insurance to the repayment of student loans, many of these investments are excluded from taxation. However, investors seeking more tax-saving opportunities can consider Tax-Saving and Tax-Free Bonds. According to experts, even if they are perfect tax-saving financial products, most individuals mistake them.

First, tax-saving bonds and tax-free bonds cater to two distinct groups of individuals and are two different investment possibilities. The first option provides investors with tax savings on the principal amount, while the second option offers totally tax-free interest. Comparatively, whereas one has a 5-year lock-in time, the other has no lock-in duration.

Let's look at the difference between Tax-Saving Bonds And Tax-Free Bonds

Tax-Saving Bonds

• These bonds give tax benefits to their owners, allowing them to reduce their overall tax burden.
• If they choose, investors can earn a certain rate of interest on these bonds, in addition to the unique provision in the Income Tax Act that provides tax benefits for investments.
• Under Section 80CCF of the Income Tax Act, a unique provision for tax-saving bonds is provided. Under this scheme, investors are eligible for tax deductions of up to Rs 20,000. One can therefore lower his or her annual taxable income by Rs 20,000.
• Note that the bond's interest earnings are taxable. The section 80CCF deduction is in addition to the section 80C deduction, which provides tax savings of up to Rs 1.5 lakh.
• Tax-saving bonds have a minimum lock-in length of five years and are suitable for medium-to-long-term investments.
• These tax-saving bonds offer low returns relative to other investments because they are low-risk solutions. Therefore, according to experts, conservative investors seeking low-risk investments should explore this alternative.

Tax-Free Bonds

• According to Section 10 of the Income Tax Act of 1961, the interest earned on these tax-free bonds is exempt from taxation. Unlike tax-saving bonds, the interest generated on these bonds is tax-free.
• Investors receive no tax benefits on the amount invested in tax-free bonds. These bonds do not qualify for section 80C deductions under the Income Tax Act. Also, unlike tax-saving bonds, tax-free bonds do not provide tax savings on the principal amount of the bond.
• These tax-free bonds provide a little higher interest rate than tax-saving bonds.
• Tax-free bonds are intended for long-term investments, with a maximum maturity of 20 years, and investors are permitted to invest up to Rs 5 lakh.
• These bonds are also eligible for listing on the stock exchange. Even though the interest collected on these tax-free bonds is tax-free, Capital gains from selling these tax-free bonds on the secondary market are subject to tax.
• Benefits derived from these bonds rely on the investor's income tax bracket.

So to conclude, People often use "tax-free bonds" and "tax-saving bonds" interchangeably. In fact, they are totally different. The tax treatment of the bonds is what makes the difference. To know more about investing in Bonds, contact Bondskart.