Report No.

PF / HT / 011007 / 307 1st October’ 07 A fortnightly refresher on Personal Income Tax

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Tax implications of
Debt products
Debts They are:
1. PPF (Public Provident Fund): Fully exempt on interest
Any investment portfolio needs to be diversified across asset
accrued and withdrawal proceeds.
classes. It is also important to have a debt component in the
portfolio. Debt in the portfolio will essentially comprise of debt 2. SPF (Statutory Provident Fund): Fully exempt on interest
instruments and other sovereign backed schemes as a part of accrued and withdrawal proceeds.
the investment portfolio. The tax implication of each investment 3. RPF (Recognized Provident Fund): Exempt up to 9.5% p.a,
has been dealt with under the following categories:- the balance is taxable on interest accrued and withdrawal
(i) Tax implication at the time of making the contribution proceeds are fully exempt.

(ii) Tax implication of any accretion of the investment’ 4. URPF (Unrecognized Provident Fund): The Interest on
employer’s contribution is not taxable at the time of the
(iii) Tax implication at the time of withdrawal
credit. Interest on employee’s contribution is taxable as
The general risk-return profile of these instruments is LOW RISK income from other sources on interest accrued and in case
and LOW RETURN. Hence, these instruments avenues are ideal of withdrawal proceeds, Employer’s contribution withdrawal
for conservative investors who believe in capital preservation. proceeds is fully taxable as salary and employee’s contribution
is fully exempt.
Provident funds
These have been time tested investment avenues for the Sovereign backed schemes
purpose of retirement planning. There are different types of These are the schemes available in the market, which are
Provident fund schemes available. Every employee should know backed by the Government and assure a fixed coupon rate.
whether their company is covered by the PF act or not and These are like NSC, Post office monthly income schemes, Post
which scheme is applicable for their company. Office recurring time deposits, RBI bonds, etc. The gains arising
out all of these are fully taxable and are taxable under the
head ‘Other Sources’.

For more information contact:

Pratul Jain
Email: [email protected]

&: +91 40 23312454 Ext: 304

Call us on : 1800 425 8283 

 A fortnightly refresher on Personal Income Tax

Bonds c. Tax benefits available:

I. At the time of contribution: The amount invested
We will discuss the tax implications of the following instruments
in these bonds will be reduced from the long term
available in the debt market.
capital gains, this results in a reduction in your taxable
income and will further reduce your tax liability.
1. Bonds issued by the Central and State governments
II. Interest accrued: Interest amount accrued is fully
These bonds are issued by the Central or the State taxable.
governments. These are basically suitable for people who
want a guaranteed coupon rate. d. Other restrictions:
I. The investment is to be made within a period of 6
2. Capital gains bonds: months from the date of sale/transfer of the asset.
II. These bonds are subject to a lock-in-period of
a. Sec. 54EC of the IT Act: Any individual who has capital
three years. It means that if the bonds are sold or
gains can look at section 54EC bonds for saving the
transferred within a period of 3 years from the date
capital gain tax. While investing in Sec. 54EC bonds, one
of acquisition, the capital gains which were earlier
can claim exemption from long term capital gains arising
exempt are taxable in the year of sale or transfer of
out of the sale of any capital asset (except shares and
the bonds.
equity oriented units). According to section 54EC, any
person (individuals, HUFs, partnership firms, companies e. Suitability:
etc.) can avail exemption in respect of long terms of I. For saving long term capital gains tax.
the bond with term capital gains (arising from the sale
II. For people who can lock their funds for 3/5 years.
of long term capital asset other than equity shares and
securities), by investing Capital gains bonds. III. For people who believe in capital preservation with
a guaranteed coupon rate
b. Issuers: The following institutions can issue these
bonds: 3. Infrastructure bonds

I. NABARD These bonds are issued by banks like ICICI, IDBI, IFCI etc.
Such bonds come with a lock in period of 3 years. The tax
II. REC implications of such bonds are:
A. The contribution towards these bonds will be eligible for
III. NHAI
a deduction under section 80C. The maximum amount
IV. SIDBI of investment that is eligible for a deduction will be
Rs.1,00,000.
V. NHB
B. Interest accretion will be fully taxable.
C. These bonds are subject to a lock-in of 3 years.

Disclaimer
The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our
analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for
personal information and we are not responsible for any loss incurred based upon it. While acting upon any information or analysis mentioned in
this report, investors may please note that neither Karvy nor Karvy Stock Broking nor any person connected with any associate companies of Karvy
accepts any liability arising from the use of this information and views mentioned in this document.
This report is intended for a restricted audience and we are not soliciting any action based on it.

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