Introduction. Tax-exempt bond financing is increasingly being used by non-profit institutions to support capital renovations and development. Bond financing can be utilized for land purchase, construction, furniture, furnishings, and equipment, as well as many other costs related with a school’s educational, recreational, and charitable goals, including refinancing of capital debt in appropriate circumstances. The low interest rates and attractiveness of the debt to lenders and investors are the main benefits of this type of bond financing. Bond financing may allow a school to begin construction sooner, increase the scope of its initiatives, or redirect its fundraising efforts to other areas. Fundraising can be directed into endowment and other projects, as well as debt reduction, with facilities financed by low-interest, long-term bonds.
The goal of this overview is to provide you a general idea of what this document is about. Under the Internal Revenue Code of 1986, as amended (the “I.R.C.”), tax-exempt bond financing for 501(c)(3) nonprofit educational institutions from pre-kindergarten to university levels (referred to herein as “Schools”) is available. The information presented may be relevant in assessing if bond financing will be accessible in specific circumstances, how the transaction will be organized and carried out, what benefits will be available, and what restrictions will be imposed. Bond Counsel, on the other hand, should be consulted early on to help determine whether a project qualifies and to ensure that the appropriate legal criteria are met.
BOND FINANCING
What is Bond Financing and How Does It Work? Bond financing is provided by a local government organization, usually a development authority, in the form of loans, leases, or installment sales “The Issuer”). The Issuer raises money by selling revenue bonds that are only repaid with money or other security provided by the School, and are never repaid by the Issuer or another governmental unit. State legislation on School Bonds differ, although they are available in the majority of jurisdictions. The interest rate is low because the Issuer’s bonds are eligible to pay tax-exempt interest to investors under the Internal Revenue Code, and the School benefits from the low interest rate. The money collected from the Bonds is either re-loaned to the School by the Issuer or used to acquire facilities that the Issuer will lease or sell to the School. Variable and fixed interest rates, prepayment, and long and short maturities are just a few of the terms that can be used to structure bonds.
What are the advantages of bond financing? Interest on eligible School Bonds is exempt from federal income taxation, alternative minimum taxation, and, in most cases, state income taxation. Borrowing rates on school bonds are significantly lower than those on traditional loans. SEC and blue sky registrations are frequently waived for such Bond issuance. Another benefit of using Bond financing is that public participation in the financing can generate significant community interest in and support for the School.
Bonds are repaid in a variety of ways. Bond financing is often backed exclusively by the School’s credit and any credit enhancements it provides, as well as assets or other security pledged for this purpose by the School. Bank letters of credit or other types of credit are widely used by schools “credit enhancement” such as bond insurance to back Bonds issued for their facilities is a good example. Because investors analyze and rely on the credit enhancer’s financial health rather than the School’s, credit enhancement ensures that the Bonds may be easily sold and achieve the lowest interest rates. However, in order to get this sort of financing, the School’s credit, financial condition, operating history, and fundraising must all meet the credit enhancer’s requirements.
Who is it that buys the bonds? Tax-exempt bonds can be offered publicly or privately. Bonds can be sold to institutional investors, mutual funds, and individuals through an underwriter or placement agent, especially if they are credit improved. Banks may purchase School Bonds and keep them as loans, while the Internal Revenue Service may charge slightly higher rates on bank-held Bonds unless they are resold “As discussed below, “Bank-Qualified.”
What are they? “What are “Bank-Qualified Bonds”? Banks and other financial institutions that hold tax-exempt bonds are generally not eligible for a tax deduction for their related carrying costs “Banks and other financial institutions may find holding tax-exempt Bonds to be relatively unattractive due to the institution’s “cost of funds,” which is determined by the ratio of borrowed funds to equity. Most Issuers, however, who reasonably anticipate issuing no more than $10,000,000 in 501(c)(3) or governmental bonds in any calendar year, may label such Bonds as 501(c)(3) or governmental bonds “Tax-Exempt Obligations That Are Qualified.” As an example, “Banks prefer to keep “Bank-Qualified” bonds since they are only subject to a 20% disallowance of the allocable carrying cost. Obligations of the Issuer and any subordinate businesses, as well as some obligations of superior entities, must be aggregated to determine compliance with the $10,000,000 threshold. It’s worth noting that an Issuer’s Bank-Qualified Bonds may affect the superior entities’ capacity to issue Bank-Qualified obligations.
Who is eligible for School Bond Financing? So long as the school is a qualifying 501(c)(3) organization, private colleges and universities, secondary schools, elementary and primary schools, and even preschool programs can use bond funding. Another type of tax-exempt bond financing that public schools can use is described in our article “This Overview is not included in the “Overview of Governmental Financing.”
WHEN A PROJECT IS FINANCEABLE
What can be financed? Most school buildings, such as classrooms, libraries, laboratories, auditoriums, buses, vans, computers, technology, recreational facilities, and administrative facilities, can be funded with School Bonds. Chapels and private sport luxury boxes are not eligible for Bond financing. A maximum of 5% of the profits of such Bonds may be utilized for property that passes both of the “private business tests” outlined below. In many circumstances, outstanding conventional debt or loans can be refinanced using School Bonds if the debtor paid financeable fees and Bond Counsel is satisfied with the documentary record.
Religious Observances Chapels and other facilities used for religious activities may not be Bond-financed. Under the right circumstances, facilities for religiously sponsored or oriented schools may be Bond-financed; nonetheless, bond counsel will carefully assess the circumstances before issuing a legal opinion.
Private Business Examinations Although this is rarely a concern for nonprofit schools, if more than 5% of the proceeds are put to “private business use” directly or indirectly, and if payment of more than 5% of the Bonds is directly or indirectly secured by or to be derived from property put to “private business use,” the Bond will be disqualified for tax exemption (or payments with respect to such property). “Private business usage” refers to the School’s use of funds that would otherwise be considered “unrelated taxable business income,” as well as use by others in any nongovernmental trade or company. In layman’s terms, while property financed with School Bonds may be used for exempt purposes by the School, the general public, or governmental units, difficulties occur when the property is utilized for non-exempt purposes by other people or companies, or by the School itself. Leases, operating contracts, and other similar usage arrangements impacting funded property are of particular relevance. If the private loan financing requirement is met, a School Bond will likewise be rejected for tax exemption. If the smaller of 5% of Bond proceeds or $5,000,000 is used directly or indirectly to make or fund loans to people other than governmental units, the private loan financing test is met. Bond Counsel should review any private business or loan difficulties in light of precise requirements.
It is necessary to document the intention to finance costs. To be financed using tax-exempt School Bonds, facility expenses must be paid prior to the Bond issue and a “official intent” to finance those costs must be stated no later than 60 days after the costs are paid. A resolution of the School’s board of directors indicating such desire is a basic form of such disclosure. An “official intent” must state that the project will be financed, specify the maximum amount of debt that will be covered, and provide a broad description of the project. To assess if a “official intent” is sufficient, bond counsel should be engaged. The Issuer’s “Inducement” (described below under “Procedural Steps”) will also act as an official declaration of intent. Bonds may be issued as late as 3 years after the declaration of official intent and as soon as 18 months after the facilities are completed if a declaration of official intent is made. Adopting a “official intent” has no drawbacks because it just preserves the potential of utilizing Bonds in the future.
BOND ISSUERS
State law applies. Governmental authorities must provide bonds for a school. Almost every state allows bond financing, yet the types of Issuers and projects that can be funded differ. Preliminary studies, direct project expenses, attorneys’ fees and other financing and issuing charges, interest paid during construction, and some reserve monies are frequently included in financeable costs. Several of the Issuers operating in Georgia are described below for illustration reasons.
Authorities in charge of development. Development Authorities, which are established by statute in every Georgia city and county and are active in many, may issue School Bonds if a majority of the Development Authority’s directors determines by resolution that the project will develop and promote trade, commerce, industry, and employment opportunities for the public good and general welfare, as well as promote the state’s general welfare. Georgia has also established a number of regional development authorities.
Authorities in charge of downtown development. Any incorporated municipality in Georgia can create a Downtown Development Authority. A Downtown Development Authority may fund school initiatives that it thinks would benefit the public good for which it was established. Downtown Development Authorities, on the other hand, can only fund projects in designated downtown development districts.
Authorities established under the Constitution. By amending the Georgia Constitution, special authorities with the authority to issue bonds have been established in around two-thirds of Georgia’s counties. In each case, the relevant legislation must be consulted.
ARBITRAGE
Restriction on Arbitrage If bonds are classified as “arbitrage bonds,” they are not eligible for tax exemption. Arbitration regulations are complicated, so we’ll just give you a quick rundown. If more than the lesser of 5% or $100,000 in bond proceeds is reasonably expected to be utilized, or to replace funds used, directly or indirectly to acquire higher yielding investments, the bonds are arbitrage bonds. Bond revenues can include cash pledged to pay Bonds, sinking funds, or other sources from which Bonds are expected to be repaid. The term “investment” covers a wide range of contracts and properties that can be assigned a rate of return. Exceptions are granted for the temporary investment of revenues, such as the temporary placement of funds in a genuinely fide debt payment fund or a fund for proceeds awaiting use. Three years is the temporary time for investing proceeds until their use in the acquisition or building of property. Investment yield restrictions do not apply to amounts in a reasonably required reserve or replacement fund, as long as the reserve or replacement fund does not exceed 10% of the issuance proceeds.
Fundraising and Replacement Funds If Bonds are used to support projects for which other money have been set aside, these monies (as well as other School funds that guarantee Bond repayment or have a sufficient “nexus” to the Bonds) may be subject to arbitrage yield restrictions. This can happen if there will be funding associated with the project. Bond counsel should be engaged as soon as possible to see if such “replacement funds” are established.
Rebate for Arbitrage Even if Bonds follow the above-mentioned arbitrage criteria, arbitrage earnings in excess of the Bonds’ yield must be rebated to the federal government on a regular basis. The rebate requirements demand that computations and filings be done on a regular basis. There are certain exceptions to the rebate requirement, such as “2-year construction,” “18-month construction,” and “6-month construction.” The School’s capacity to comply with the applicable exemption may have an impact on when it wants to finalize the Bond issuance.
Construction Exemption for 2 Years. The construction exemption applies to financings in which at least 75% of the obligations’ “net revenues” will be used for construction, reconstruction, or rehabilitation. If the net proceeds are spent in accordance with the following minimum requirements, the rebate requirement is waived: 10% within six months, 45 percent within one year, 75 percent within 18 months, and 100 percent within two years (except that the two year period may be extended to three years if the requirement would have been met within two years but for a reasonable retainage not exceeding 5 percent required to ensure compliance with the terms of a construction contract). The proceeds of the offering (save for monies placed in a reasonably required reserve fund) plus investment proceeds obtained before the end of the period are referred to as “net proceeds.” If an election is made on the closing date, however, net proceeds exclude interest earnings on any reasonably required reserve fund; however, interest earnings on such a fund will be subject to the rebate requirement beginning on the closing date, rather than at the end of the two-year expenditure period. If the Issuer elects to pay a penalty in lieu of paying the rebate amount on or before the closing date, the rebate requirement is deemed satisfied if the Issuer pays a penalty equal to 1.5 percent of the amount of the net proceeds of the issue that are not spent as required at the close of each six-month period after the closing date.
Exemption for 18 months. If all gross revenues (excluding those placed in a reasonably required reserve fund) are expended in accordance with the following schedule, the rebate obligation is waived: Within 6 months, at least 15%; within 12 months, at least 60%; and within 18 months, at least 100% (with an exception for reasonable retainage spent within 30 months).
Exemption for six months. If all gross proceeds (excluding those held in a reasonably required reserve fund) are spent within six months, the rebate obligation is waived.
Exemptions are limited. The need to rebate arbitrage from investment of a reasonably required reserve fund or arbitrage on a bona fide debt service fund in excess of $100,000 per year is not relieved by compliance with the construction, 18-month, or 6-month exemptions.
OTHER LIMITATIONS
The length of time it takes to pay off a school bond. Federal law limits the average maturity of a School Bond issue to 120 percent of the project’s average reasonably projected economic life. The average economic life must be weighed by taking into consideration the costs of the project’s various components. The economic life of a Bond is calculated from the date it is issued or the date the facilities are put into service, whichever comes first. Midpoint lives for personal property under the former ADR system and guideline lives for buildings under Revenue Procedure 62-21 may be used as safe harbors when determining economic lives. In general, land is not taken into account while calculating the average.
Prohibition on Federal Guarantees. If the payment of principal or interest is directly or indirectly guaranteed in whole or in part by the United States or any of its agencies or instrumentalities, school bonds are not eligible for tax exemption. If 5% or more of the revenues are utilized to make federally guaranteed loans or invest in federally insured deposits or accounts, the bonds will be treated as guaranteed by the federal government. Exceptions are granted to allow proceeds to be invested in US Treasury liabilities, as well as investments of bona fide debt service funds, reasonably required reserve funds, and funds to store proceeds before they are used.
Projects that are purely speculative. In order to comply with many provisions of federal and state law, the specific assets to be financed with a Bond must be determined with reasonable certainty prior to issuance. A bond cannot be issued to fund unspecified projects or contingencies, or in an amount that is significantly greater than that required for the project.
Costs of Issuance A maximum of 2% of the revenues of a School Bond may be utilized to cover expenditures related with the bond’s issuance. Any costs that are not covered by the budget can be covered by other means.
A shift in usage. A change in the use of a facility financed with a School Bond to a use for which such a Bond could not have been issued could result in the Bond’s interest being taxable or have other repercussions.
INDUCEMENT
Resolutions to induce inducing inducing inducing inducing inducing The first step in a School Bond transaction is usually to get an incentive resolution and agreement from the Issuer (the company issuing the bonds) “Induction”). An Issuer’s agreement in principle to issue Bonds for a proposed Project is referred to as this. The Inducement can be used to declare something “In lieu of a School’s board resolution, the “official intent” stated above will be used.
Expiration. An inducement can have an expiration date or not. In any case, a School Bond must be granted within three years of the official intent and eighteen months of the date a Project is purchased or placed in service, whichever comes first.
FORM OF TRANSACTION
General. Because a School Bond transaction involves the employment of an Issuer as an intermediary, it differs from a traditional finance transaction. The precise form to be utilized is determined by the parties’ interests as well as local requirements. The Issuer sells the Bond and uses the profits to fund the Project in any transaction. Loans, leases, and installment sales are the three most typical types of transactions.
Loans. By statute, an Issuer may be allowed to loan revenues from School Bonds to a School for use on a project. When this form is employed, the School enters into a loan agreement with the Issuer and typically provides a note as collateral. The loan agreement and note will be assigned as security for the Bond by the Issuer. In such a sale, the School retains ownership of the project. This is the most basic and widely used configuration.
Leases. The majority of Issuers can, and some must, own the financed project and lease it to the School. When this form is employed, the project site is usually ceded to the Issuer, and the project is built or acquired in the Issuer’s name using the Bond proceeds. The project is then leased to the School, which agrees to pay rents that will be used to pay down the Bond’s principal and interest. As security for the Bond, the Issuer assigns its lease rights. When the Bond is paid, the School usually purchases the project for a small fee.
Sales made in installments. It’s not uncommon to use an installment selling transaction. The Issuer takes title to the project in this transaction, which is analogous to a lease transaction. Rather than leasing the project, the School enters into an installment sale arrangement, agreeing to pay purchase price installments equal to the Bond’s debt service. The School may receive title to the project immediately or when the Bond is paid.
Control of the project by the school. The School is typically responsible for insurance, taxes, and upkeep under any arrangement, loan, lease, or sale, and has design and construction freedom, and may be considered the project “For all intents and purposes, you are the “owner.” The School has essentially the same authority over the project as it would under traditional finance for the period of the loan. Covenants and security mechanisms that are common in traditional lending can also be included in a Bond transaction.
Bonds are eligible for credit. In most cases, neither the Issuer, the local government, nor the state provides any credit for the Bonds, regardless of the transaction’s structure. The bondholders rely on the School’s underlying commitment, as well as any guaranties, mortgages, security instruments, insurance, letters of credit, or other funds or credit enhancements obtained by the School, to pay the Bonds.
“Demand Bonds with Variable Rates” In the Bond market, specialized financing solutions have emerged that offer extremely attractive terms. ‘The’ “The “variable rate demand bond (VRDB)” or “lower floater” type of financing accesses short-term markets for a longer-term stated maturity, but with a “put” option that allows the bondholder to cause the Bond to be repurchased on behalf of the School at regular intervals (typically weekly). owing to the “A variable rate demand Bond with the “put” feature can be sold in the short-term market, which has the lowest interest rates. A remarketing agency can change the interest rate on a Bond like this. A variable rate demand Bond may be kept by a single holder for any length of time and is typically sold at a discount “put” if the holder has other financial obligations or market interest rates have risen to the point that the Bond’s rate is no longer desirable. If a lower floater Bond is “put” due to an upward rate shift, the remarketing agent will set a new, higher rate at which the Bond can be re-placed; if market rates fall below the Bond rate, the agency will reset the rate to the lowest rate that will prevent the Bond from being “put.” Any variable rate demand Bond that is repurchased must have a credit facility from a rated institution available to advance the repurchase price “reintroduce”
PROCEDURAL STEPS
Placement of Bonds. Following the receipt of an inducement and the determination by Bond Counsel that the transaction can be appropriately structured as a School Bond issue, the School will typically place the Bonds through an investment banker or underwriter. Bonds can be placed privately, for example, with an investor group or a financial institution, or sold publicly through a mutual fund. When a bond fund or a public sale is used, disclosure documents are usually prepared. A trustee may be appointed for the issuance depending on the nature and number of bonds.
Documentation required by law. The terms and provisions of the Bond, as well as the supporting paperwork, must be negotiated and agreed upon once the form of Bond sale has been selected. The majority of the transaction’s documentation will be prepared by Bond Counsel. If funds are available, acquisition and building of the Project could begin during this time if a declaration of official intent has been made.
“Hearing on the TEFRA Act. A public hearing is required by federal law “TEFRA” to be held at least 14 days after the community is notified of a proposed School Bond and the type and location of the project in a published notice. Following the public hearing, the Bond must be approved by both the Issuer and an appropriate elected official or legislative body with jurisdiction over the project.
Other Procedures and Validation Prior to the issuance of a Bond, many states need additional procedural requirements. Most Bonds in Georgia, for example, must be judicially validated in a case in which the State, the Issuer, and the School all participate. This proceeding will require the publication of a new public notice. The closing date is influenced by both TEFRA and state procedures.
Report on Information. An information report detailing the School Bond, the Issuer, the School, and the project must be filed with the Internal Revenue Service in conjunction with the transaction’s closure.
LIVING WITH A BOND ISSUE
Following the issuance of Bonds, the School’s obligations are only slightly different from those of a traditional loan. The School’s 501(c)(3) status must be maintained, and the project must not be used by for-profit businesses or operations. If an exemption does not apply, the School must avoid arbitrage activities and pay an arbitrage rebate.
BOND COUNSEL
Bond Counsel should be retained if they have knowledge with municipal bond law. Bond Counsel’s role is to organize and document the transaction, as well as to provide an opinion on the Bond’s validity and tax status. Bond Counsel fees are paid by the School with bond revenues. Other parties may be represented by Bond Counsel, or the School, the Issuer, and the Bond purchaser or underwriter may be represented independently. Smith, Gambrell & Russell, LLP is a Bond Counsel firm that is included in the “Red Book.”
SUMMARY
This letter is intended to give you a quick understanding of school bond financing. Tax-exempt bonds may offer significant benefits, but they are subject to rigorous federal and/or state regulation. This summary can only touch on a few of the most important problems and should not be construed as a comprehensive examination of all legal issues. Instead, this Overview gives some background material that might be used to start a conversation with Bond Counsel.
What sorts of bonds are tax-free in the United States?
Federal income from state, city, and local government bonds (municipal bonds, or munis) is normally tax-free. However, you must record this income when you file your taxes.
In most cases, municipal bond income is tax-free in the state where the bond was issued. However, take in mind the following:
- Occasionally, a state that normally taxes municipal bond interest would exempt special bonds when they are issued.
Municipal bond income may potentially be free from local taxes, depending on your state’s regulations. For further information on the rules in your state, see a tax advisor.
What effect do school bonds have on taxes?
Bonds are often repaid using property taxes by citizens. Voting “yes” on a bond issue ultimately implies approving a tax increase to fund the school system. For example, in Alameda, California, a school bond issue suggested raising property taxes by nearly $60 every $100,000 of assessed value. If you owned a $500,000 home in the district, you would have to pay an extra $300 each year in property taxes to pay off the bond.
Is it true that bonds are tax-free?
Basic rate tax does not apply to taxable event gains on UK bonds. The gain is treated as having been taxed at the basic rate by the individual or trustee who is liable for tax under the chargeable event system. This reflects the fact that the funds underpinning a UK insurance are taxed as life funds in the United Kingdom. Unless the policy was purchased for actual consideration, any gain is free from capital gains tax. See the section on capital gains taxes below.
How do school bonds function?
You can decide, just like at home, that you need to build a new garage or rebuild the kitchen. The problem is figuring out how to pay for it. You might either pay with cash from your savings or take out a loan.
School districts confront similar challenges and have similar solutions. They may desire a new school or require renovations to an existing structure.
A common option for a school district to borrow money is to issue a bond, which functions similarly to a loan, and ask taxpayers for a Bond Levy, or a tax increase. The extra tax revenue is used to repay lenders or bondholders, as well as to pay interest on the loan.
Most of these levy requests must be approved by the state, especially if the state gives matching funds or contributes. The bond will be sold and administered by a bank or financial institution.
Voters provide their approval for a school district to raise taxes to pay for a loan or a bond.
The bonds, also known as IOUs, are sold by a financial institution and the proceeds are given to the school system.
The bond and interest are paid back to the bondholders by the tax money over a period of years.
What is the taxation of bond income?
Bond mutual funds typically generate consistent income from a diverse portfolio of securities. As a result, the income tax rate is determined by the securities held by the fund. Furthermore, because fund managers buy and sell bonds on a regular basis, there may be capital gains and losses. Bond funds distribute interest and capital gains from their investments to their owners, who are taxed on the taxable component of those payments. While the entire return of a fund should be considered when considering it as an investment, keep in mind that the fund’s reported historical return is usually expressed as a pretax number.
Bond funds produce interest on a daily basis, but it is paid out to investors on a monthly basis. The underlying investments that provide that income determine how that money is taxed. Income from taxable bond funds is normally taxed at ordinary income tax rates at the federal and state levels in the year it is earned. State taxes may be waived for funds that invest solely in US Treasury bonds. Municipal bond fund interest income is normally tax-free at the federal level, and it may also be tax-free at the state and local levels if the bonds held by the fund were issued by the state where you live. Before investing in a fund, read the prospectus to see if the fund’s interest will be subject to federal, state, or municipal taxes.
On a bond fund investment, there are two ways that investors may incur capital gains tax. The fund manager’s capital gains (and losses) as he or she buys and sells securities are the first consideration. The same considerations that determine whether the profit from the sale of a bond in the fund is taxed at ordinary income tax rates or is eligible for a reduced capital gains rate apply. Investors are usually informed of their earnings or losses once or twice a year. The fund firm will account for how your overall gain or loss is created and tell you how much of it is due to long-term capital gains, short-term capital gains, and interest income, all of which will affect how much tax you owe.
Second, depending on your cost basis, the size of your initial investment, and any dividends reinvested, you’ll make a profit or a loss when you sell the fund’s shares. Capital gains and losses are both taxable, and capital losses may result in a tax benefit.
You should speak with a tax professional to learn how the facts of your tax status may affect the tax treatment of income earned by your investments.
Bonds and bond funds, like other assets, can be held in a tax-advantaged retirement account such as a 401(k) or IRA to defer taxes. You won’t owe any taxes with this plan until you take money in retirement, at which point you’ll face ordinary income tax on any distributions.
If taxable bond funds or individual bonds are held in a tax-free account like a Roth IRA, the income generated by them is tax-free, as long as certain conditions are followed.
Life insurance
Individuals and their families can use insurance to achieve a range of financial goals. On admission and redemption, all types of life insurance plans, including endowment, term, and moneyback, are eligible for tax benefits.
Financial protection against death, allowing the family to cope financially in the absence of the breadwinner.
Individuals can also attain their financial goals tax-free by investing in ULIPs (unit-linked insurance plans). ULIPs are market-linked and better suited to investors with a medium to high risk tolerance.
According to India’s tax system, the tax benefits granted on ULIPs are identical to those offered on other life insurance plans.
Public Provident Fund (PPF)
PPF is a government-sponsored, tax-free savings and retirement planning vehicle. It is advantageous to those who do not have a formal pension plan.
The PPF’s interest rate is determined by the debt market. Although partial withdrawals are available after the sixth year, money is locked in for a period of 15 years. In the hands of investors, redemption funds are tax-free.
New Pension Scheme (NPS)
The New Pension Scheme (NPS), which is governed by the Pension Funds Regulatory and Development Authority, or PFRDA, is specifically designed to assist individuals in saving for retirement.
Any Indian citizen between the ages of 18 and 60 is eligible to participate. It is cost-effective due to the minimal fund management fees. Money is maintained in three accounts, each with its own asset profile: equity (E), corporate bonds (C), and government securities (G) (G). Investors have the option of managing their portfolio actively (active choice) or passively (passive choice) (auto choice).
NPS is advantageous for individuals with diverse risk appetites who want to save money for retirement because of the variety of possibilities available.
The total deduction limit under all sub-sections of Section 80C, such as 80CCD and 80CCC, cannot exceed Rs 1.5 lakhs.
Pension
Pension is a type of life insurance that meets a specific requirement. While protection plans (such as term plans) are designed to provide financial security to an individual’s family in the event of his death, pension plans are designed to provide for the individual and his family if he survives.
Deposits
Tax-free income is available from 5-year tax-saving bank fixed deposits as well as post-office time deposits. They are one of the greatest tax-free investments in India for people who have a low risk tolerance and want to save money in the long run.
Senior Citizens Saving Scheme (SCSS)
The Senior Individuals Security System (SCSS) is a government-sponsored program that provides financial security to senior citizens. Individuals above the age of 60 are eligible to participate in the plan. Investors can make a one-time deposit with a minimum investment of Rs 1,000 and a maximum of Rs 15 lakhs (in case of joint ownership) and Rs 9 lakhs (in case of single holding) (single). The lock-in period is five years, with interest paid quarterly and taxable in the year of accrual and subject to tax deduction at source.
Do bonds increase taxation?
Putting “no tax increase” in front of “bonds” is designed to dampen opposition to increased taxes, as it is with many political words. But, to be clear, there is no category of bonds issued by school districts that does not result in an increase in your taxes. Bonds with no tax increase raise your taxes.
How? Bonds are frequently issued by school districts to fund capital projects such as the construction of new facilities or the renovation of existing infrastructure. The bonds are paid off over time by the taxpayers, usually through an increase in their property taxes. Bonds are issued for a set period of time, and when they are paid off, the tax payments of the taxpayers are reduced.
Are bonds a viable substitute for taxation?
Local, state, and federal governments all tax the interest on corporate bonds. However, interest on bonds issued by state and local governments (often referred to as municipal bonds or munis) is normally tax-free. If you live in the state where a particular muni is issued, it may also be tax-free on a state or local level.
Income from Treasury securities, which are issued by the United States government, is exempt from state and local taxes but not from federal taxes, unlike munis. The main idea is that federal, state, and municipal governments can levy taxes at their own levels but not at the other levels; for example, states can tax securities issued by other states but not by the federal government, and vice versa.
What is the distinction between a levy and a bond?
Municipalities can raise funds in two ways: through bonds and taxes. A bond is a public debt that must be repaid with interest at some point in the future. A levy, on the other hand, is a tax imposed on local property owners by towns and counties to raise funds for services.
How can I avoid paying bond interest taxes?
Cashing your EE or I bonds before maturity and using the money to pay for education is one strategy to avoid paying taxes on the bond interest. The interest will not be taxable if you follow these guidelines:
- The bonds must be redeemed to pay for tuition and fees for you, your spouse, or a dependent, such as a kid listed on your tax return, at an undergraduate, graduate, or vocational school. The bonds can also be used to purchase a computer for yourself, a spouse, or a dependent. Room and board costs aren’t eligible, and grandparents can’t use this tax advantage to aid someone who isn’t classified as a dependent, such as a granddaughter.
- The bond profits must be used to pay for educational expenses in the year when the bonds are redeemed.
- High-earners are not eligible. For joint filers with modified adjusted gross incomes of more than $124,800 (more than $83,200 for other taxpayers), the interest exclusion begins to phase out and ceases when modified AGI reaches $154,800 ($98,200 for other filers).
The amount of interest you can omit is lowered proportionally if the profits from all EE and I bonds cashed in during the year exceed the qualified education expenditures paid that year.