There are tax free bonds that are coming out in the market and these are attractive for the investors in different ways. One of the main ways in which they are attractive is that the amount that is earned here would not be taxable in their hands. However there can be situations wherein the individuals find themselves in a spot where there is an element of taxability that creeps into the entire instrument. This could be on account of the capital gains that are earned on the bond and hence this would have to be considered in the overall working that is being undertaken. Here is a look at the matter in detail.
Tax free status
When it comes to the question of a tax free status for the various bonds that are being issued by different institutions then this is restricted to a specific part of the income that the bonds actually generate. The interest that is earned on the bonds are tax free in nature and hence the amount that comes in through this route would not be considered for the purpose of taxation and the amount would be added to the tax free income list that is present for the individual. The tax benefit is however restricted to this mode and hence it does not go further into all aspects of the taxability of the bonds and this is something that has to be considered by investors looking to put money in to the bonds. So if the investors holds the bonds till maturity then there will be no tax on the interest and no capital gains will arise so the tax implications would be limited.
Capital Gains
One of the ways in which the individual will earn some other type of income is through the capital gains route. The bonds that are issued to the individual are usually tradable in the secondary market. This means that the individual would be able to ensure that there is some element of liquidity that is present in their investments. This means that the instrument is actually listed on the stock exchanges so if there is someone who wants to raise some money from the instrument already with them then they can actually go to the exchange and trade the bonds. When the bonds are traded in this fashion then there is a chance that the investor witnesses either a capital gains or a capital loss in the process. This has to be considered from the point of view of taxation because it represents income for the individual and this would be taxable.
Taxability
If the individual has some element of capital gains for the purpose then this would have to be offered for the purpose of taxation. The tax free aspect is that the interest income is not to be taxed but the other forms of income would not have the same benefit so this has to be taken into consideration. If the individual has seen that they have a bond that has been sold for a price that is more than the cost for this purpose then the individual would have to consider this as a capital gain. The time of the holding of the bonds have to be considered so that it is determined whether the capital gains are short term or long term in nature. There is a lower rate of tax for the long term capital gains and hence this is a beneficial rate that is lower than the short term rate but is still there has to be some tax to be paid. This is calculated at 20 per cent though the benefit of indexation will be available for the individual. The higher rise in the cost inflation index in recent years is a bit of a relief for those investors who have already booked capital gains but there can also be a capital loss which would be set off against other gains.
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Interest on tax free bonds is not taxable but CG is
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Interest on tax free bonds is not taxable but CG is
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Interest on tax free bonds is not taxable but CG is
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