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It's Bond. 8% Savings Bond

July 20, 2004 12:11 IST

The government's decision to discontinue 6.5% Savings Bonds took a lot of investors by surprise. These bonds were possibly the only instruments in the domain of small savings which offered tax-free returns and found favour with various segments of the investing population.

However, all is not lost. The 8% Savings (Taxable) Bonds have been left unchanged and continue to be a lucrative option.

One aspect of the 8% Savings Bonds which consistently worked against them was that the interest income is taxable; however, the finance minister's proposal whereby "no one with a taxable income of Rs 100,000 will be required to pay income tax" should ease the burden on a considerable number of investors.

Investing in a bond which offers higher than market rate, the highest degree of safety and doesn't add to your tax burden is surely a good deal.

Secondly for investors in the higher tax brackets, for whom the proposed tax concessions don't hold any attraction, the 8% Savings Bonds would still be a smart option.

Section 80L under the Income Tax Act provides tax deductions of Rs 15,000 pa. While Rs 12,000 is available for interest income from bank deposits, dividend income received from specified mutual fund schemes and income from specified securities; the additional deduction of Rs 3,000 is reserved exclusively for Central/ State Government Securities.

Investors should consider investing in the 8% Savings Bonds to claim deductions for the entire sum under Section 80L.

For example, if you are invested in bank deposits and other instruments like the National Savings Certificate, interest incomes from which amount to Rs 12,000 annually; there exists a opportunity for you to invest additional sums in the 8% Savings Bonds, earn interest and yet not enhance your tax liability.

Further investing in the 8% Savings Bonds can be a very convenient proposition for the investors since tax is not deductible at source.

Hence investors don't have to grapple with claiming refunds at the time of filing returns.

Having stated all the positives, now let us take a look at the flipside of investing in the 8% Savings Bonds. The bonds have a tenure of 6 years with no exit option i.e. there can be no premature redemption. However if liquidity is not a concern, the bonds continue to be an attractive investment option and should find a place in your portfolio.

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