Registered bondholders relinquish their legally discharged bond certificates (by signing on the reverse of the bonds with a Revenue Stamp of Re. 1/-) on the date of maturity. The redemption record date is one month before the deemed encashment / redemption date.
After infrastructure bonds mature, what happens to them?
As a result, the tax-advantaged long-term infrastructure bonds were not really tax-free bonds.
The annual interest payout option and the cumulative interest option were both available to the investors.
While investors who chose annual interest distributions have already paid tax on the amount of interest received, those who chose the cumulative option would pay more tax in the year of investment than they saved in the year of investment.
Confusion over Tax-Saving vs. Tax-Paying Infrastructure Bonds
Taxpayers who take advantage of free bonds end up paying more in taxes than they receive in benefits.
Taxation
Because the interest on long-term infrastructure bonds is taxable, the interest earned by the investors annually for those who chose the annual option and aggregate on maturity for those who chose the cumulative option will be added to their taxable income.
As a result, tax payable will be lower for investors in lower tax bands and higher for those in higher tax brackets.
TDS
For Resident taxpayers who choose the cumulative option in physical format, the interest payment will be subject to a 10% Tax Deducted at Source (TDS) if the interest payment upon redemption exceeds Rs 5,000.
The TDS rate will increase to 20% if the bondholder does not have a valid PAN or if the investor has not submitted his tax returns for the last two years and the total TDS and TCS in each of those years is Rs 50,000 or higher.
TDS of 31.2 percent would be applied to interest payouts for non-resident taxpayers.
How to save TDS
Resident bondholders must submit Form 15G / 15H, as appropriate, to avoid TDS. Those who did not disclose their PAN data at the time of investment must update their PANs with the various RTAs within the time frames set by the bond issuers.
Non-Resident bondholders must submit a tax officer’s order under Section 197 / 195 setting NIL / lower TDS rates to the appropriate RTAs before the deadline to guarantee that TDS is collected at the rates provided in the order.
What is the procedure for withdrawing an infrastructure bond?
Bonds are redeemed Registered bondholders relinquish their legally discharged bond certificates (by signing on the reverse of the bonds with a Revenue Stamp of Re. 1/-) on the date of maturity. The redemption record date is one month before the deemed encashment / redemption date.
What exactly is a Long-Term Infrastructure Bond?
The second tranche of infrastructure bonds from L&T Infra has been released. Section 80CCF allows you to invest up to Rs 20,000 and receive tax benefits. Each bond has a face value of Rs 1,000, and you must purchase a minimum of five bonds. You will be paid an annual interest rate of 8.2 percent if you choose the yearly interest option.
How can I purchase infrastructure bonds in 2021?
If you have a demat account, you can apply to invest in an infrastructure bond online. You must complete an online application form.
These relationships can be applied for in a physical form. You’ll need a PAN card that has been self-attested. As part of the KYC (Know Your Customer) procedure, you must provide proof of identity and address.
After the lock-in period has expired, these bonds can be exchanged on stock exchanges like stocks.
How do you account for revenue from infrastructure bonds?
Koushis received a tax credit of Rs 2,000 (without cess) in AY 2011-12 since he was in the 10% tax bracket.
The interest was paid on a regular basis and just the capital invested was refunded at maturity under the non-cumulative option, whereas the cumulative option increased the value of each IDFC Bond from Rs 5,000 to Rs 10,800 at maturity.
As a result, the entire maturity value of his Rs 20,000 investment should be Rs 43,200, with a net gain of Rs 23,200. However, Koushis was taken aback when a tax of 7.5 percent, or Rs 1,740, was deducted at source (TDS) before the maturity value was transferred to his bank account.
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Koushis now wonders if he needs to pay 22.5 percent more (excluding cess) on the Rs 23,200 gain now that he is in the 30% tax band.
“In the hands of the investor, interest earned on Long-Term Infrastructure Bonds would be taxable under the heading ‘Income from Other Sources.'” “The interest on such bonds is not eligible for the deduction under section 80CCF of the Income Tax Act, 1961,” said Dr. Suresh Surana, founder of RSM India.
“It’s crucial to understand the distinction between tax-saving bonds and tax-free bonds in this context. Tax-free bonds are those in which the interest component is exempt from taxes or tax-free, whereas tax-saving bonds are those in which the principle component is deducted by the investor when calculating his taxable income. As a result, the interest on the Infrastructure bonds in question, which are tax-free bonds, would be taxed,” he explained.
On maturity, it will result in a total tax burden of Rs 6,960 (excluding cess), whereas he received a tax advantage of Rs 2,000 by investing in tax-saving long-term infrastructure bonds.
“There would be no direct tax advantage accruing to the investor on account of rising from a 10% to a 30% tax band over ten years,” Dr. Surana stated of the benefit.
However, under the non-cumulative option, Koushis’ tax burden would have been lower because the interest payments were consistent as he progressed from the 10% to the 30% tax rate.
He now regrets choosing the cumulative option due to the misunderstanding that tax-saving bonds and tax-free bonds are the same thing.
Not only Koushis, but the ambiguity surrounding tax-saving and tax-free bonds has surprised many taxpayers who have reaped tax benefits by investing in Long-Term Infrastructure Bonds issued by IDFC, REC, IIFCL, and others and have subsequently moved to a higher tax bracket over the 10-year investment period, as the tax payout on maturity value under the cumulative option exceeds the tax benefit reaped on the investment amount.