To avail added deduction up to Rs 20,000 more than and above the 80C deductions from his taxable revenue in the Assessment Year (AY) 2011-12, Koushis Dey (name changed) invested in Long-Term Infrastructure Bonds issued by IDFC Ltd in the Financial Year (FY) 2010-11 as a tax-saving choice u/s 80CCF.
As the cumulative choice provided larger return than the non-cumulative choice, Koushis invested Rs 20,000 in the cumulative choice to get 4 bonds of Rs 5,000 each and every assuming that the gains on maturity will be tax-no cost.
As he was in the 10 per cent tax bracket in AY 2011-12, Koushis got a tax advantage of Rs 2,000 (with no cess) in that year.
Under the non-cumulative choice, interest payout was normal and only the capital invested is returned on maturity, when beneath the cumulative choice, the worth per IDFC Bond of Rs 5,000 becomes Rs 10,800 on maturity.
So, the total maturity worth of his investment of Rs 20,000 need to be Rs 43,200 with the net obtain of Rs 23,200. But Koushis got shocked when 7.5 per cent or Rs 1,740 tax was deducted at supply (TDS) ahead of he got the maturity worth credited in his bank account.
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As he is now in the 30 per cent tax bracket, Koushis now wonders if he requirements to spend 22.5 per cent more (excluding cess) on the obtain quantity of Rs 23,200.
“The interest derived from Long-Term Infrastructure Bonds would be taxable under the head ‘Income from Other Sources’ in the hands of the investor. The deduction u/s 80CCF of the Income Tax Act, 1961 does not pertain to the interest on such bonds,” mentioned Dr. Suresh Surana, founder, RSM India.
“In this context, it is important to note the difference between tax-saving bonds and tax-free bonds. Tax-free bonds refer to such bonds where the interest component on the bonds is exempt from taxation or is tax-free whereas tax-saving bonds are the ones where the principal component is allowed as a deduction to the investor while computing his taxable income. Thus, Infrastructure bonds in question, being tax-saving bonds, the interest on the said bonds would be subjected to taxation,” he explained.
It will outcome in a total tax liability of Rs 6,960 (excluding cess) on maturity, when he availed tax advantage of Rs 2,000 by investing in the tax-saving lengthy-term infrastructure bonds.
But, why is the TDS price 7.5 per cent?
“The interest derived from such bonds would be subjected to TDS u/s 193 of the Income Tax Act. Section 193 requires the payer of such interest to deduct TDS @ 10 per cent while making payment of such interest or crediting the account of the payee, whichever is earlier. However, the government has reduced the rate of TDS on specified payments (including those made u/s 193) made to residents on account of the pandemic situation. Such tax rate has been reduced by 25 per cent for the period between May 14, 2020 to March 31, 2021, thus making the applicable TDS rate u/s 193 to be 7.5 per cent,” mentioned Dr. Surana.
Talking on the advantage, Dr. Surana mentioned, “There would be no direct tax advantage accruing to the investor on account of moving from 10 per cent to 30 per cent tax bracket over 10 years.”
However, the tax liability of Koushis beneath the non-cumulative choice would have been reduce as the interest payout was normal as he moved progressively from 10 per cent to the 30 per cent tax bracket.
He now rue more than deciding on the cumulative choice due to the confusion that tax-saving bonds are the similar as tax-no cost bonds.
Not only Koushis, the confusion more than tax-saving and tax-no cost bonds has left numerous taxpayers – who availed tax added benefits by investing in Long-Term Infrastructure Bonds issued by IDFC, REC, IIFCL, and so forth and have moved to larger tax bracket more than the 10-year investment period – startled, as tax payout on maturity worth beneath cumulative choice exceeds the tax advantage availed on the investment quantity.