NABARD Bonds have become popular with investors who want secure and consistent returns. This is a type of bond issued by the National Bank of Agriculture and Rural Development (NABARD) to raise funds that can be used in the rural infrastructure, development of agriculture, and other development activities. Although these connections are a safe investment with a government agency as the guarantor, there are numerous investors who do not know how these instruments are taxed. The key to the tax on NABARD bonds is to direct investors towards informed choices on financial matters and maximizing post-tax benefits.
This paper discusses the taxation policies related to NABARD bonds, such as taxation on interest rates, capital gains, and other tax exemptions, as well as the necessary information for individual investors.
NABARD Bonds
The NABARD bonds refer to debt issues issued by the National Bank of Agriculture and Rural Development. These bonds are a good security investment for individuals who want to take low-risk, highly guaranteed securities (government-backed). The money collected from these bonds is used to finance agribusiness, rural infrastructure, and rural development in India.
These bonds are sold to investors by authorized dealers, banks, and, in rare cases, by the official channels of NABARD. The bonds of the NABARD product are in both taxable and tax-free types, and it is important to understand how the two contrast in order to determine their tax implications.
Types of NABARD Bonds
- Taxable NABARD Bonds: These are ordinary bonds in which interest accrued is subject to full taxation under Income Tax Act, 1961. Such bonds will also receive interest income that will be reported in the head Income from Other Sources in your Income Tax Return (ITR).
- Tax-Free NABARD Bonds: The Central Government notifies some of the NABARD bonds as tax-free bonds. The interest on such bonds is not subject to income tax under section 10(15)(iv)(h) of the income tax act. This exemption is, however, only on the interest part and not on the capital gains on their sale or transfer.
Taxation on Interest Income
It is based on the taxation of the NABARD bond interest, which is taxable or tax-free.
In the case of taxable NABARD bonds, the interest received on such bonds is added to the investor’s total income and taxed at their applicable income tax slab rate. For example, if an investor is found in the 20 percent income bracket, the interest earned on these bonds shall be taxed at 20 percent plus surcharge and cess, where necessary.
In case of tax-free NABARD bonds, the interest received on the bond is tax-free. Nevertheless, investors should keep in mind that despite the exemption in the revenue, it still has to be disclosed in the exempt section of the ITR under the income category.
Tax Deducted at Source on NABARD Bonds
According to taxable NABARD bonds, TDS can be subtracted by an issuer provided that the amount of annual interest paid by the bond is greater than the established limit. The current TDS rate under Section 194A is 10% provided that the investor has provided a valid PAN. In the event that the PAN has not been given, TDS would be deducted at 20 percent.
In the case of tax-free NABARD bonds, no TDS is allowed to be deducted as all the interest is not taxed.
Investors whose taxable income is less than the taxable income threshold may file either Form 15G or Form 15H to exclude the deductions of TDS on the interest earned on their taxable NABARD bonds.
Capital Gains Sale or Redemption Tax
Investors who dispose of bonds issued by NABARD by selling them or redeeming them before maturity also face tax implications. The capital gains will depend on the time the bonds are held.
If the bond is sold or transferred within 12 months, the gain will be considered a short-term capital gain (STCG) and charged at the investor’s income tax rate.
The gain is considered a long-term capital gain (LTCG) in case the bond is held longer than 12 months. With listed LTCG taxed at 10% (non-indexed) or 20% (indexed), which is more advantageous, depends on the type of bond held by the holder. In the case of unlisted NABARD bonds, the tax on LTCG is taxed at the tune of 20% including indexation benefits.
Capital Gains exemption
Capital gains can also be exempted by investors under certain conditions. When the proceeds of the sale of NABARD bonds are reinvested in the specified assets, that is, bonds issued by NHAI or REC, within the time limit stipulated in the Act, the investor will be liable for exemption under Section 54EC of the Income Tax Act.
However, this exemption is limited to Rs.50 lakh per financial year and should be claimed within six months of the transfer of the NABARD bonds.
How to Report in ITR NABARD Bond Income?
Recording NABARD bond income in the ITR is easy and should be done correctly to prevent tax complications.
In the case of taxable bonds, the interest would be included in the Income from other Sources category. TDS deducted will automatically be reflected in Form 26AS, and it can be claimed during return filing.
In the case of tax-free NABARD bonds, income is to be reported in the section Exempt Income. The capital gains obtained on the sale of these bonds, either in the short term or the long term, should be reported under the segment Capital Gains.
The Advantages of Investment in NABARD Bonds
Taxation is a significant factor, but NABARD bonds remain attractive to investors because of several advantages. These include sovereign-level safety, constant returns, and, in certain instances, tax-free interest returns. To a conservative investor or an investor who needs to diversify his or her portfolio with government-supported securities, NABARD bonds are the best choice.
In addition, NABARD is also known to be instrumental in the development of rural areas; hence, an investment in such bonds serves as an investment in agricultural and rural development in India.
Conclusion
NABARD bonds are a secure and strong investment facility, and they have taxable and tax-free versions. Tax treatment should be carefully evaluated by investors prior to making a certain investment to ensure that it fits their income tax bracket and financial objectives.
The interest on taxable NABARD bonds is subtracted from income and is subject to tax according to slab rates, while tax-free NABARD bonds do not receive any interest. Capital gains, on the other hand, are taxable according to the holding period, and exemptions are available by reinvesting the assets in acceptable assets.
Knowing the taxation of NABARD bonds is not only a way of being compliant but also assists investors in planning their investments more effectively and increasing their post-tax returns.
