What are the tax implications of investing in fixed deposits and bonds?
Interest income on fixed deposits and bonds, such as 8% Savings (Taxable) Bonds is taxable under the head "Income from other sources". The entire income received is taxable.
Can investors claim any tax benefits for investments made in fixed deposits/bonds under Section 80C? Similarly, are any benefits available to investors on the interest income?
Investments in fixed deposits with a scheduled bank for a fixed period of not less than 5 years are eligible for deduction under Section 80C. Infrastructure bonds also qualify as eligible investment avenues under Section 80C. Section 10(15) states the list of various securities and bonds on which interest is exempt from tax.
Are investments made in these instruments subject to tax deducted at source (TDS)? What is the limit below which TDS is not applicable?
Yes, if the interest from such investments exceeds Rs 5,000 in a financial year then TDS is applicable. The TDS limit is raised to Rs 10,000 in case of interest payment on fixed deposits by a bank.
Can investors avoid TDS; if yes what documents are required to be provided for the same?
Investors can avoid TDS by presenting Form 15G, which states that the person does not have a taxable income.
If the bank deducts tax at source, how should an investor claim the benefit?
The assessee has to file a return of income every year declaring his total income and the tax payable thereon. He can furnish the TDS certificate with the return filed and the tax payable would reduce accordingly. If additional tax has been paid, then the excess amount will be refunded to him by tax authorities.
What are capital gains savings bonds & what benefits do they offer?
Investments in capital gains savings bonds enable investors to avoid paying the capital gains tax. These bonds are issued by REC and NHAI. For example, when a property is sold and a long-term capital gains tax liability arises, the assessee has an option to avoid it by investing the capital gains in another property within the specified time duration. Another option available to him (to avoid paying tax) is to invest the requisite sum in capital gains bonds within a period of 6 months from date of transfer.
Investors should ensure that these bonds are not transferred or converted within a period of 3 years from the date of acquisition; also no loan, mortgage or encumbrances should be created on these bonds. In such an event, investors will lose the tax benefits and capital gains will become taxable.
Maximum investment allowed in these bonds (i.e. REC & NHAI) is Rs 5 m (50 lakhs) during any financial year.