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Infrastructure Bond: Confusion over Tax-Saving Vs Tax-Free Bonds makes taxpayers pay extra tax than profit availed

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income tax, tax-saving bonds, tax-free bonds, Long-Term Infrastructure Bond, additional tax benefit, 80CCF, 80C benefits, TDS, cumulative option, non-cumulative option, tax on maturity, taxable interestThe curiosity derived from Lengthy-Time period Infrastructure Bonds could be taxable below the top ‘Earnings from Different Sources’ within the palms of the investor.

To avail extra deduction as much as Rs 20,000 over and above the 80C deductions from his taxable revenue within the Evaluation 12 months (AY) 2011-12, Koushis Dey (title modified) invested in Lengthy-Time period Infrastructure Bonds issued by IDFC Ltd within the Monetary 12 months (FY) 2010-11 as a tax-saving possibility u/s 80CCF.

Because the cumulative possibility supplied greater return than the non-cumulative possibility, Koushis invested Rs 20,000 within the cumulative choice to get 4 bonds of Rs 5,000 every assuming that the positive factors on maturity will likely be tax-free.

As he was within the 10 per cent tax bracket in AY 2011-12, Koushis obtained a tax good thing about Rs 2,000 (with out cess) in that yr.

Underneath the non-cumulative possibility, curiosity payout was common and solely the capital invested is returned on maturity, whereas below the cumulative possibility, the worth per IDFC Bond of Rs 5,000 turns into Rs 10,800 on maturity.

So, the whole maturity worth of his funding of Rs 20,000 must be Rs 43,200 with the web achieve of Rs 23,200. However Koushis obtained shocked when 7.5 per cent or Rs 1,740 tax was deducted at supply (TDS) earlier than he obtained the maturity worth credited in his checking account.

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As he’s now within the 30 per cent tax bracket, Koushis now wonders if he must pay 22.5 per cent extra (excluding cess) on the achieve quantity of Rs 23,200.

“The curiosity derived from Lengthy-Time period Infrastructure Bonds could be taxable below the top ‘Earnings from Different Sources’ within the palms of the investor. The deduction u/s 80CCF of the Earnings Tax Act, 1961 doesn’t pertain to the curiosity on such bonds,” mentioned Dr. Suresh Surana, founder, RSM India.

“On this context, you will need to be aware the distinction between tax-saving bonds and tax-free bonds. Tax-free bonds discuss with such bonds the place the curiosity part on the bonds is exempt from taxation or is tax-free whereas tax-saving bonds are those the place the principal part is allowed as a deduction to the investor whereas computing his taxable revenue. Thus, Infrastructure bonds in query, being tax-saving bonds, the curiosity on the mentioned bonds could be subjected to taxation,” he defined.

It’s going to end in a complete tax legal responsibility of Rs 6,960 (excluding cess) on maturity, whereas he availed tax good thing about Rs 2,000 by investing within the tax-saving long-term infrastructure bonds.

However, why is the TDS fee 7.5 per cent?

“The curiosity derived from such bonds could be subjected to TDS u/s 193 of the Earnings Tax Act. Part 193 requires the payer of such curiosity to deduct TDS @ 10 per cent whereas making cost of such curiosity or crediting the account of the payee, whichever is earlier. Nevertheless, the federal government has lowered the speed of TDS on specified funds (together with these made u/s 193) made to residents on account of the pandemic scenario. Such tax fee has been lowered by 25 per cent for the interval between Might 14, 2020 to March 31, 2021, thus making the relevant TDS fee u/s 193 to be 7.5 per cent,” mentioned Dr. Surana.

Speaking on the profit, Dr. Surana mentioned, “There could be no direct tax benefit accruing to the investor on account of shifting from 10 per cent to 30 per cent tax bracket over 10 years.”

Nevertheless, the tax legal responsibility of Koushis below the non-cumulative possibility would have been decrease because the curiosity payout was common as he moved regularly from 10 per cent to the 30 per cent tax bracket.

He now rue over deciding on the cumulative possibility because of the confusion that tax-saving bonds are the identical as tax-free bonds.

Not solely Koushis, the confusion over tax-saving and tax-free bonds has left many taxpayers – who availed tax advantages by investing in Lengthy-Time period Infrastructure Bonds issued by IDFC, REC, IIFCL, and so on and have moved to greater tax bracket over the 10-year funding interval – startled, as tax payout on maturity worth below cumulative possibility exceeds the tax profit availed on the funding quantity.

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