How Your Debt Investments Are Taxed

Tax rates governing the instruments can be quite diverse at all the three stages — at the time of investment, while receiving regular interest income and at maturity or sale

- Keerthi Sanagasetti

Just as it takes all kinds to make the world, there are all kinds of instruments in the fixed-income bucket. This category has expanded over the years from the plain-vanilla bank fixed deposits and post office savings accounts to the somewhat more complicated debt mutual funds. The wide array in fixed-income instruments provides multiple choices for investors across the risk spectrum.

But while evaluating the potential returns from fixed-income instruments, investors need to factor in the tax incidence. After all, what really matters to you as an investor is the post-tax return. The tax incidence governing fixed-income instruments can be quite diverse at all the three stages — at the time of investment, on regular interest payouts/accruals and on redemption/maturity or sale.

With policymakers having to do a delicate balancing act between trying to goad investors to save through tax incentives on certain investments, and making sure that undue tax advantage is not available on too many instruments, investors have their task cut out while choosing fixed-income investments. We attempt to make the task simpler for you by explaining the tax incidence on some popular fixed-income categories such as bonds/ debentures, deposits including post office schemes, debt mutual funds and retirement-planning products.

Bonds and debentures

Bonds and debentures are issued by public as well as private companies.

Tax break on investment

Apart from regular returns on investment in the form of interest payments, certain bonds can fetch you additional tax savings in the year of investment. Section 80C of the Income Tax Act allows the subscription to notified bonds issued by some institutions, such as the rural bonds issued by NABARD, to be claimed as a deduction from total income.