Difference between Tax Saving and Tax Free Bonds

A lot of investors tend to get confused between the two types of tax-friendly avenues that are getting popular these days - Tax Free Bonds and Tax Saving Bonds. However, it is critical to note the difference between the two

Tax Saving Bonds are Long Term Infrastructure Bonds issued in pursuance of Section 80CCF of the Income Tax Act, 1961 which was introduced as part of offering investors tax deductions for investment in development of infrastructure in the country

According to the said Section 80CCF of the Income Tax Act, 1961, in computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, the whole of the amount, to the extent such amount does not exceed twenty thousand rupees, paid or deposited, during the previous year, as subscription to long-term infrastructure bonds as may, for the purposes of this section, be notified by the Central Government

These bonds save tax because when you invest in them then you can reduce your taxable income (up to a maximum of Rs. 20,000) and thereby lower your tax incidence. However, the interest income on them is taxable, so they are not tax free. By investing in these bonds, investors can avail deduction under Section 80CCF of upto Rs.20,000/-, which will be over and above the prevailing deduction of Rs.100,000/- for investments made under Section 80C of the Income Tax Act, 1961

Tax Free Bonds, on the other hand would not qualify as an investment under Income Tax Act and thus, any investment made in them would not reduce your taxable income. However, the interest that would be accrued or received on these bonds would not be considered a part of your taxable income. Thus, the tax benefit in this case does not arise at the time of making the investment but at the time of receiving income from such investment which is tax-free