States, counties, towns, and other government entities issue Munis to fund significant capital projects such as the construction of schools, hospitals, roadways, and other public structures.
Municipal bond interest is normally exempt from federal income taxes. If your home state or city issues the bond, it may also be free from state or municipal income taxes. Interest earned on muni bonds issued by a different state or city is taxable on your state or local income tax return.
The term “triple tax exempt” refers to municipal bonds that are exempt from federal, state, and local taxes.
Savings bonds, US Treasuries, and Treasury bonds issued by the US Department of the Treasury are all tax-exempt to some extent. You owe federal income tax on them if you own them. They are, however, usually exempt from state and municipal income taxes.
Is the interest on REC bonds taxable?
It should be emphasized that interest is not tax-free, and tax on interest must be paid according to the taxpayer’s income tax bracket. As a result, Capital Gains Tax is only applied to the amount invested. Income tax applies to the interest earned on these bonds.
Are 54EC bonds exempt from taxation?
54EC bonds are attractive investment vehicles because they allow investors to deduct long-term capital gains from their taxes. Other benefits are available with 54EC bonds.
- Interest: On 54EC bonds, interest is taxable. On interest from 54EC bonds, no TDS is deducted, and wealth tax is not applicable.
- 54EC bonds have a five-year lock-in period (beginning in April 2018) and are non-transferable.
- The minimum investment in 54EC bonds is Rs 10,000, while the maximum investment in 54EC bonds in a financial year is Rs 50 lakhs with 500 bonds.
NHAI or REC: which bond is better?
REC bonds have a somewhat higher rating than NHAI bonds. Because NHAI bondholders must request for surrender of bonds at maturity, which is after 5 years, and only then is the maturity amount redeemed and paid by cheque or ECS. It will be automatically redeemed and paid by check or ECS in the case of REC bonds.
Is TDS deducted from REC bond interest?
10,000 in REC and NHAI bonds, respectively. These bonds have a 5-year lock-in period (starting in April 2018) and are non-transferable. The interest rate on both REC and NHAI bonds is 5.75 percent per year, payable annually. The interest earned on 54EC bonds is taxable, however there is no TDS deducted. The risk of interest and capital payment is protected because 54EC bonds are AAA rated and supported by the government.
What makes bonds tax-free?
At the federal level, bonds used to fund municipal and state government projects such as buildings and roadways are tax-exempt. Furthermore, consumers who buy bonds issued by their states or municipalities may not have to pay state or local taxes on the interest they earn.
Is the interest on IDFC infrastructure bonds tax deductible?
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.
Have you filed your ITR yet? Here are some of the ramifications of missing the March 31 deadline.
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.
What is a section 54EC exemption?
The capital gains on the sale of a long-term capital asset whether an immovable property or shares and stocks are excluded from taxation provided the profit is invested by the taxpayer in ‘long-term defined assets’ within 6 months of the sale, according to Section 54EC. Government notified bonds and securities, such as those issued by the National Highways Authority of India (NHAI) and the Rural Electrification Corporation, are referred to as “long-term defined assets” in this context (REC).
However, you can only deposit a total of Rs. 50 lakh in these bonds. If your total capital gains exceed Rs. 50 lakh, instead of buying bonds under Section 54EC, you may wish to build a house and take advantage of Sections 54 or 54F. However, if you are unable to choose one of the above choices, you will be required to pay LTCG tax on the remaining capital gains.
The bonds purchased with the capital gains amount should be held for at least 5 years by the taxpayer. If you sell the bonds before the end of the 5-year period, the Section 54EC exemption will be revoked, and you will be required to pay LTCG tax on the initial capital gains amount.
Is there a capital gains tax on bonds?
While interest income from municipal bonds is normally tax-free, capital gains from bond sales are subject to federal and state taxes. The difference between the selling price of the bond and the original purchase price of the bond is the short-term or long-term capital gain or loss on a bond sale.