Difference Between Tax-Free Bonds and Tax-Saving Bonds

Tax Treatment:

• The interest earnings from the tax-free bonds, both at federal and state levels, are excluded from income taxation.

• The benefit of Tax-Saving bonds is that investors can get the benefits on principal amount. 

Interest Income Taxation:

• There is no tax on the interest-income-exempt bonds earned.

• Tax is applicable on Interest income from these bonds. Investor has to pay according to his/her tax slab.  

Investment Objective:

• Tax-free bond organisations aim to generate tax-free income as the primary goal. They are handy for the high-tax bracket investors.

• The primary aim of investing in tax-saving bonds is to reduce taxable income by deducting the principal figure that is funded from the annual income. 

Maturity Period:

• Long-term tax-free bonds with maturity times averaging 10 to 20 years and even more are usually issued.

• A public bond with a tax-saving nature is a medium-term bond, and maturity period range is 5 to 10 years.

Lock-in Period:

• There are no lock-in periods for tax-free bonds. Investors can trade when they want and redeem them when they choose to.

• The bonds issued for tax-saving purposes are either partial or clear-cut; however, they are all subject to a mandatory five-year lock-in period.

Investment Limit:

• Individuals can invest in small or large amounts with no upper limit on the fund volume of tax-free bonds.

• Under the section of 54ec of income tax, investment of upto 50 lakh can be done through these bonds.

Issuers:

• The issuer of tax-free bonds includes the National government or state powers, city authorities, and government-sponsored institutions.

• The government entities like  Power Finance Corporation Limited (PFC), Indian Railways Finance Corporation Limited (IRFC) issue these bonds. 

Basis

Tax-Free Bonds

Tax-Savings Bonds

Applicable section of Income Tax Act

Section 10(15)

Section 54EC

Lock in

No lock-in duration. Investors, however, buy bonds back in the secondary market instead of in primary phase in order to publicize those bonds.

Comes with a lock-in period of 5 years. 

Tenure

10 to 20 years (usually a long-term tenure)

Maturity period of this bond is ranging from 5 to 10 years. 

Tax Benefits

The interest income from this deposit is not taxable and thus the liability for TDS on it does not arise.

Under Section 54EC of income tax, recent long term gains of up to Rs. 50 lakh can be invested in this bond to defer tax.