Every income earned by Resident, NRI and RNOR (Resident but Not Ordinarily Resident) person in India may have tax implications provided the person meets specific criteria. HUDCO Tax Free Bond may by name be tax-free but there are tax implications in certain situations. Here is the what-if analysis of tax liability for an individual investor of HUDCO Tax Free Bond.
If a person stays invested for full tenure of the bond
Interest earned on Tax Free Bonds does not add to one’s income so the interest earned becomes tax-free.
If a person sells the bonds in secondary market within 1 year of buying
Appreciation of price of bond will be considered Short Term Capital Gain and the profit will be added to the income of individual. The person will be charged income tax in the highest tax slab the person falls in.
If a person sells the bonds in secondary market after 1 year of buying
Appreciation of price of bond will be considered Long Term Capital Gain. As per the provision of Long Term Capital Gain, the person may pay income tax of 10% without indexation. Provision of paying Income tax of 20% with indexation is not available for debentures so one may not avail indexation benefit.
If a person transfers the bonds to someone else and the receiver sells within 1 year of buying
It will have the same implication as “If a person sells the bond in secondary market within 1 year of buying”
If a person transfers the bonds to a company and the company invests in certain long-term bonds
If capital gains arising out of the sale of bonds is invested in certain long-term bonds without 6 months of transfer then income tax will not be assessed on such capital gain. If company exits from those certain long-term bonds within 3 years of purchase then entire tax exemption on the bonds will be reversed. Any proportion of non-investment of capital gain or early exit on certain long-term bonds will be taxed proportionally.
If bonds are sold within 1 year and invested to buy residential property
Capital gain generated by sale of bonds will be exempt from income tax if the entire proceeds of the sale is used to buy a residential property bought a year before the sale of bonds or two years after the sale of bonds or 3 years if property is constructed. There are two conditions on such exemption:
- The person should not own more than one residential property other than the new residential property purchased against capital gain.
- The person should not sell/transfer the newly purchased property within 3 years of buying. If person sells/transfer the property before 3 years then the capital gains would become taxable.
If a person receives the bonds as gift
If a person receives bonds as gift that exceeds Rs 50,000 market value and the receiver paid a price less than market value of bonds then the difference of market value of bonds and the price paid to get them will be added to the income of receiver. This condition will not be applicable if bonds have been received:
- From any relative
- On the occasion of the individual’s marriage
- As per will or inheritance
- In case of death of the person who gifted
- From local authority
- From any fund, foundation, university or educational institution
- To any hospital or medical institution
- From any trust or institution
HUDCO Tax Free Bonds can be a good investment option provided one is informed and careful about the tax implications. Overall, opt for this bond for its own merits. Chime in if you have any comments or suggestions.