Tax-Saving Infrastructure Bonds: Find out how much tax you’ll have to pay at maturity and how to avoid TDS.

The long-term infrastructure bonds that were issued in FY 2011-12 to allow tax deductions of up to Rs 20,000 from taxable income are set to mature in FY 2021-22.

The long-term infrastructure bonds that were issued in the Financial Year 2011-12 to offer deductions of up to Rs 20,000 from taxable income under section 80CCF of the Income Tax Act are set to mature in the Financial Year 2021-22.

Although the bonds provided tax benefits under section 80CCF at the time of purchase, the bonds’ interest is taxable in the hands of investors.

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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.

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.

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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 will not be applied to investors who hold bonds in demat form.

TDS of 31.2 percent would be applied to interest payouts for non-resident taxpayers.

How can TDS be saved?


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.