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Mutual Funds | 24 Sep 2021

How Bonds Serve The Purpose Of Tax Savings?

To make sure that the government of a country works with efficiency and provide their citizens with the appropriate resources, paying tax becomes a necessary duty. Paying taxes should be done responsibly and should not be thought of as a burden. So you, as a citizen of a nation, enjoying the resources provided by the government, should pay your fair share of taxes.

But government being the well-wishers for the nation's citizens has allowed every person to shave off a portion of the burden of paying taxes by means of investments. The government has introduced a number of schemes that exempt a person from paying taxes (a portion of it). With the tax saving options, people can also earn profits in the form of interest rates. The interest rates earned under these schemes are deducted from the total income, thus helping minimize the income tax amounts to be paid.

Among the most famous and the best options that help tax savings comes tax-saving bonds. The government introduces these bonds to help with saving taxes. As backed by the government, they are legal and are permitted under the income tax act. To get a brief of the tax savings by government introduced bonds, look at the information below.

The necessity of taxpaying and tax saving schemes

India, which is known as the largest democracy in the world, runs smoothly due to the regular flow of taxes paid by the Indian citizens. With each digit adding to the amounts of tax paid, the country grows with its initial capacity. So every Indian citizen has to pay their share of taxes, to help the country and the government grow and prosper.

But as taxpaying can prove to be a burden for many families with low incomes, the government decided to help them with tax savings. There are various schemes available in the banking institutions and financial houses that the government backs to help the citizens with tax savings. People can choose them according to their own choices and preferences. This topic will discuss one of the most beneficial schemes introduced by the government for tax savings through investments.

Tax Saving Bonds

Tax saving bonds lie among the government's various schemes to help the people with tax savings. In simple words, bonds are a type of document which provides their holder with certain benefits, including the tax savings in return for a specific investment. Holding bonds means sticking with them for a time period of 5 years.

Taking part in this scheme includes three parties-

• The person who wants to issue these bonds

• The institution that is providing these bonds

• The person under whose name these bonds exist

These bonds help the holders be exempted from a portion of taxpaying from the overall taxpaying amounts. With a special provision in income tax, the bondholders can earn a certain amount of interest rates offered by the government. These bonds are suitable for people interested in mid or long-term investments for tax savings as the lock-in period for the scheme is 5 years.

As told above, there are many tax-saving schemes available in the market, but all of them do not come with a sense of trust and security. Unlike the other schemes, bonds come with no risky conditions along with providing attractive rates of return. This makes it ideal for the people who want to save their taxes without the risk of investing money. With bonds, the investors get an assurance that they will receive specified returns according to their investment.

How do the tax-saving bonds work?

The leading working of these bonds is for attractive tax-saving rates. The bonds enjoy privileges of tax savings under Section 80CCF of the income tax department. Be it any amount of bonds you buy, and you can only get a maximum tax deduction of Rs 20000. This means that these 20000 Rs are directly deducted from the total income earned by you, ultimately minimizing the total tax to be paid by Rs 20000.

However, these tax-saving bonds are different from tax-free bonds. In tax-free bonds, owners don't enjoy the exemption from tax savings and are also not provided with the interest rates on their invested money. It would be best if you were precise in buying both as government bodies back them both, but the higher advantage of tax savings and earning can only be provided by tax saving bonds.

The working of these tax-saving bonds is not affected if you have invested in other schemes for tax saving. By investing in the tax-saving bonds, you get an additional exemption from the tax equaling to an amount of Rs 20000.

Interest rates offered by tax saving bonds

As told above that these tax saving bonds, along with serving the purpose of tax savings, provide the owners to earn their saved money by providing interest rates on their invested money. The interest rates in the tax-saving bonds have been fluctuating since the year these were introduced. However, the approximate digit for the interest rates provided under tax saving bonds is 7-8%.

After the completion of the maturity period of 5 years, you will end up with vast amounts of tax savings along with a lump sum of interest earnings.

Taxes saving bonds are suitable for?

Any individual interested in saving the taxes through the means of investment can invest in the bonds. It is best suitable for people who avoid other tax saving schemes due to risk factors. As the government backs the bonds, there are no risk factors, and you can get assurance for the safety of your invested money.

People interested in long term tax savings should for sure invest in buying these tax-saving bonds. You can purchase these bonds by visiting any of your nearby banking branches providing the scheme of tax saving bonds. In total, 21 different branches can help you invest in these bonds.

Investment in the bonds requires minimal amounts equaling to Rs 1000. You can be a part of the scheme sitting in your comfortable homes by following the online filing form. However, an individual can invest in the bonds only when he has a Demat account of his own. You are suggested to go on briefly with the terms and conditions before making your final bond payment.

Benefits of investing in tax saving bonds

  1. Provide the best means of exempting an individual from his duty of taxpaying.
  2. As backed by the government of India, there are no risk factors, and you can get an assured outcome from your invested money.
  3. Beneficial for the people who are interested in long term tax savings- like a time period of 5-7 years.
  4. Along with tax savings, people can boost their savings with the interest rates provided under the bonds.
  5. Legal tax savings under the Section 80CCF of the income tax laws

However, for the convenience of people, the government has introduced a variety of tax savings bonds in the banking institutions. These bonds differ in terms of their features, benefits, interest rates, investments and few other things. This is because people might have an interest in different bonds and the different purposes they serve. So introducing different bonds was necessary for the convenience of people. Some of them are listed below

• 7.75% of GOI Saving bonds

This is the latest tax saving bond which has replaced the 8% saving bonds. This bond provides interest rates higher than most the fixed deposits, but the interest earned is taxable.

• Sovereign gold bonds

This is suitable for people who have an interest in buying bonds for gold. It was introduced with the rising trend of buying physical gold. These bonds provide 2.5% interest rates and can be used for collateral purposes.

• Capital Gains bonds

These bonds provide the people with tax savings when they sell any of their land assets. These bonds provide an interest rate of 5.5%, and you can invest a maximum amount of Rs 5000000 in these bonds.

Final thoughts

We hope that with our article, we provided you with every bit of information you need to know on the tax-saving bonds and how they serve the purpose of tax saving along with giving interests.

However, we have the perfect means for you for other tax-saving benefits and better management, i.e. Money Spring Tool. The tool provides you with the best investment opportunities and helps you enjoy early advantages. The various schemes offered by the experts of Money Spring can be compared within the tool itself to measure its outcome.

Some other areas of expertise of Money Spring are:

• Providing insurance policies which also help in tax savings

• Fixed deposits that also serve the purpose of tax savings

• Various PMs schemes

All these can help you with the tax savings and help you earn money through interest. So if you are interested in access of the tool, you can click on the following link:

LINK: https://app.moneyspring.in/auth/login

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