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.
As a result, the tax-saving 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.
Because the interest on long-term infrastructure bonds is taxable. The interest earned by the investors will be added to their taxable income. Where interest calculations are on a per annum basis for those who chose the annual option. Whereas it is aggregate on maturity for those who chose the cumulative option.
As a result, tax payable will be lower for investors in lower tax brackets and higher for those in higher tax brackets.
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.
The TDS rate will increase to 20% if the bondholder does not have a valid PAN. The investor will same TDS rate if the investor has not submitted his tax returns for the last two years; where the total TDS and TCS in each of those years is Rs 50,000 or higher.
No TDS will be applicable to investors who hold bonds in Demat form.
TDS of 31.2 percent would be applicable to interest payouts for non-resident taxpayers.