Friday, September 22, 2023

Which Government Bonds Are Tax Free

Don't Miss

Difference Between Buying From Primary Market To Secondary Market


There is a huge difference in buying the tax-free bonds from the primary market to the secondary market. Hence, you have to understand it with the utmost care.

When you are buying the tax free bonds from the primary market, the buying price is the same as that of the face value of the bond. It means, if the face value of a bond is Rs.1,000, then the bond is available for you at Rs.1,000 itself.

However, when you buy the tax free bonds from the secondary market, then the buying price is not equal to the face value of the bond. Suppose the face value of the bond is Rs.1,000, then it may be available at a discounted rate or at a rate higher than the face value of the bond.

Hence, based on the bond price and interest rate you will receive till maturity, the bond yield will vary. If the price of the bond is lesser than the face value, then the yield for holding such bonds will be higher. Same way, if the price of the bond is more than the face value, then the yield of holding such bonds will be lesser.

The meaning of yield in simple terms is the return you will receive by investing in the bond. The yield on the bond will be inverse to the price of the bond.

How Are Municipal Bonds Taxed

A bond is a debt security issued by a company or government to raise money and cover spending needs. A municipal bond, also known as a muni, is debt security used to fund capital expenditures for a county, municipality, or state. Municipal bonds are commonly tax-free at the federal level but can be taxable at state or local income tax levels or under certain circumstances.

Where Can I Find My Tfsa Contribution Room Information

Your TFSA contribution room information can be found by using one of the following services:

  • Represent a Client if you have an authorized representative.
  • Tax Information Phone Service at 1-800-267-6999.

In addition, if you want to receive a TFSA Room Statement, call us. You can also ask for a TFSA Transaction Summary that shows the information that we received from your TFSA issuer about your contributions and withdrawals.

If the information that we have about your TFSA transactions is not complete or if you have made contributions to your TFSA this year, use Form RC343, Worksheet TFSA contribution room, to calculate your TFSA contribution room for the current year. If we have deemed your unused TFSA contribution room to be a specific amount, do not use this form call us for more information.

You must keep records about your TFSA transactions to make sure that your contributions do not go over your TFSA contribution room. We will keep track of an individual’s contribution room and determine the available TFSA contribution room for each eligible individual based on information provided annually by the TFSA issuers.

Don’t Miss: Government Grants For Small Business In Florida

Why To Buy Tax Free Bonds In India

Let us say that your are in the 20 and 30 per cent tax brackets and you earn an interest rate of 50,000 from your bank deposits. Those in the higher tax bracket would end up paying almost 15,000 as taxes on interest income, thus reducing your yields. Take a look at the list of tax free bonds that have decent interest rates and where the interest is tax free.


What Are The Features Of Tax

City of Philadelphia Loan


In the case of tax-free bonds, the interest income is entirely tax-exempt. Also, the tax deducted at source does not apply to these bonds. However, it is advisable to declare your interest income as the principal amount invested in tax-free bonds do not qualify for a tax deduction under Section 80C.

You may purchase tax-free bonds in both, physical and the Demat form. Tax-free bonds, when compared to bank FDs, offer a tax-efficient return to investors who fall in the highest income tax brackets.

Risk factors

Chances of default on principal and interest payment are very low as these schemes are issued on behalf of the government itself. Also, it offers capital protection and a fixed monthly or annual income. Hence, it can be considered quite safe.


You cannot liquidate tax-free bonds as quickly as, say, debt mutual funds. Since government bonds are long-term investments and have more extended lock-in periods, liquidation of the tax-free bonds may not be that easy.

Lock-in tenure

Tax-free bonds have a longer lock-in period that ranges from 10 years to 20 years. You cannot withdraw your money before the maturity date. Therefore, please make sure that you do not need this money shortly after investing.

Issuance & transaction

Tax-free bonds are issued through a Demat account or in physical mode. You may buy tax-free bonds from the secondary market to achieve short-term financial goals.



Also Check: Government Employee Discounts Universal Studios Orlando

Do Tax Free Bonds Qualify For 80c Deduction

No, tax free bonds dont qualify for 80C deduction. However, tax saving bonds do. Investment in tax saving bonds qualifies for tax exemption up to INR 20,000 under Section 80CCF. This is over and above the limit of INR 1,50,000.

There are other tax-saver investment plans under section 80C. One of them is the tax-saving mutual funds, Equity linked Saving Schemes . Equity linked Saving Schemes can help investors save tax and also generate wealth through equity investment. The returns from these mutual fund investments can be calculated using mutual fund returns calculators like the SIP calculator and lumpsum calculator. Scripboxs SIP calculator and lump sum calculator are available online and are free to use.

Additionally, one can use an income tax calculator to calculate their tax liability. Scripboxs income tax calculator also suggests investments if there is any scope for saving more tax.

What Is The Meaning Of Yield On Tax

As I said above, the yield is the RETURN that you will get it by investing in the bonds. Let me simplify this concept. Because it is very much important to understand the concept of yield when you are investing in bonds.

Assume that you are buying a Bond, whose face value is Rs.1,000, tenure is 10 years and the price is also Rs.1,000 with coupon rate at 8% .

In such a case, the YIELD will be 8%. Because it means by investing Rs.1,000 , you are receiving 8% yearly income up to 10 years.

However, assume that suddenly RBI increased the interest rate. Assume that there are other options that are offering you higher returns than 8%. Hence, no one will buy such 8% yield bonds. In such a case, the price of this particular bond will fall. Hence, even though the face value remains the same i.e Rs.1,000, the price of the bond may fall. Assume it fallen to Rs.900.

Now those who buy these bonds will earn more than those who purchased it at Rs.1,000 right? Because of those who purchased by investing Rs.1,000 and those who purchased by investing Rs.900 will earn the same interest rate of 8%. However, those who purchased at Rs.900 will have lesser investment to earn the same 8% returns.

Read Also: How To Work For The Government From Home

What Determines Whether Interest On A Bond Is Taxable

The interest on bonds issued by state and local governments is generally tax-exempt at the federal level, unless more than 10% of the proceeds are used for trade or business activities by nongovernmental entities, including leasing a public building to a private entity for business use. And nonprofits with 5013 status, including colleges and hospitals, can issue tax-exempt bonds provided that no more than 5% of the proceeds are used for private business unrelated to the nonprofits charitable purposes. Regardless of whether the bond is taxed at the federal level, states independently determine whether they tax municipal bond interest. A 2008 Supreme Court ruling cleared the way for states and localities to exempt their own municipal bonds interest from their own taxes while taxing interest from other state and localities municipal bonds.

What Is A Tfsa

All About Tax Free Bonds

The TFSA program began in 2009. It is a way for individuals who are 18 years of age or older and who have a valid social insurance number to set money aside tax-free throughout their lifetime.

Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account is generally tax-free, even when it is withdrawn.

Administrative or other fees in relation to a TFSA and any interest on money borrowed to contribute to a TFSA are not tax-deductible.

Recommended Reading: Government Mutual Life Insurance Company

Things To Remember Before Opting For Tax

Wisely chosen bonds can act as safe haven for your investments. In this case, tax-free bonds can serve as an ideal investment tool as they are totally free from tax payment. However, before investing in tax-free bonds you need to know the basic facts about tax-free bonds and how they function:

  • Tax-free bonds come with a lock in-period of 10 to 20 years. The amount invested in a tax-free bond cannot be withdrawn before the expiry of applicable lock-in period.
  • The interest income earned from these bonds are completely free from income tax.
  • Tax-free bonds can be transacted in stock exchanges. Any investor can buy and sell these tax-free bonds on the stock exchanges.
  • Although the interest earned by investing tax-free bonds is not taxable, any capital gains received from selling these tax-free bonds in the secondary market are taxable.
  • Tax-free bonds are issued both in demat format and physical mode.
  • Interest rates on tax-free bonds ranges between 7.3% to 7.5% per year. However, these rates are dependent on the ratings on bonds given by credit rating agencies.

I Bond Taxation Basics

Before getting into the special exemptions, here are the basics of I bond taxation:

  • Series I savings bonds are not subject to state or local taxes. When you invest in Series I savings bonds, you won’t pay state or local taxes on the interest income you earn. That means that more money ends up in your pocket at the end of every year than if you were to own an ordinary bond.
  • Series I savings bonds are subject to federal taxes. When you buy your Series I savings bonds, you will owe the federal government taxes on the interest income you earn during the time you hold it. This is due to the fact that the Series I savings bond is a special type of bond known as a “zero-coupon,” meaning that you won’t receive regular checks in the mail instead, the interest you earn is added back to the bond’s value, and you’ll earn interest on your interest.
  • You have a choice between one of two taxation methods: the cash method or the accrual method. The cash method means that you will only pay tax on your I bonds when you redeem them . If you hold your bonds for 20 years, then you won’t pay any tax during that period, but you’ll owe a tax when you sell out of the investment. If you opt for the accrual method of taxation on your I bonds, you will pay the tax that is due on the interest you earned for the year that was added back to your principal.

Don’t Miss: Does The Government Sell Student Loans

Is This Guide For You

This guide is for individuals who have opened or who are considering opening a tax-free savings account . It gives general information on this investment opportunity such as who is eligible to open a TFSA, what the contribution limits are, possible tax situations, non-resident implications, transfers on marriage or relationship breakdown, what happens when a TFSA holder dies, and various other topics. For more information on the TFSA, go to Tax-Free Savings Account.

This guide does not deal with every tax situation. It is not intended to cover all possible situations or to replace professional financial, tax, or estate planning services.

As with other important investment decisions, you should speak with your financial advisor or a representative at your financial institution to be sure you are aware of any conditions, limitations, or administrative fees that may apply.

We have included definitions of some of the terms used in this guide in the Definitions section. You may want to read this before you start.

Other Ways To Avoid Paying Taxes

MMT Podcast

There are several other conditions for paying no taxes on your Series I savings bonds.

It’s important to understand that the Series I savings bond tax benefits will be reduced by the amount of any scholarships, fellowships, employer-provided educational benefits, or other forms of tuition reduction, according to the Treasury Department. These will be deducted directly from the qualified educational expense calculation.

If the value of your bonds exceeds the number of your qualified expenses paid during the year, the amount of interest you can exclude on your taxes is reduced pro-rata. That is why you may want to consider acquiring several smaller-denomination paper Series I savings bonds instead of a few larger-denomination bonds. You can redeem them in smaller batches to prevent that from being a problem.

Read Also: Federal Government Pro Bono Program

Tfsa Payment Of Taxes

Most TFSA holders have no tax payable related to their TFSA investments, and no TFSA tax return has to be filed. However, when TFSA taxes are applicable for a year, Form RC243, Tax-Free Savings Account Return, must be filed by of the following year. Any tax owing must also be paid by that date.

If a TFSA return is required but has not been filed, we may use information provided by your issuers to calculate any tax payable by you.

You can view filed TFSA returns and schedules online at My Account for Individuals.

Excess TFSA amount correspondence explained

The CRA may send out a letter or a proposed TFSA return to Canadians who, under certain situations, may have over contributed to their TFSA. You may also receive a proposed TFSA return if you made contributions to your TFSA while you were not a resident of Canada.

Excess TFSA amount letter

If you receive a excess TFSA amount letter and you have already removed the excess TFSA amount, you do not have to do anything else. If you have not removed the excess, it should be removed immediately. For information on your current year room limit, go to My Account or complete Form RC343, Worksheet – TFSA contribution, if you have contributed to your TFSA in the current year.

The proposed TFSA return package

The proposed TFSA return package normally includes the following:

Responding to the proposed return package

TFSA Processing Unit

Post Office Box 14000, Station MainWinnipeg MB R3C 3M2

Using Series I Bonds To Pay For Education Expenses

You won’t pay any tax on the interest income you earn from your Series I savings bonds if you use them to pay for qualified educational expenses and meet the income limits. Qualified educational expenses include tuition and fees, such as required lab courses, to a university or college. They also include expenses paid for any course required as a part of your degree program or certificate-granting program. The expenses must be incurred on behalf of you, your spouse, or a dependent for whom you claim an exemption on your taxes. You are required to use both the principal and the interest income from your Series I savings bonds to pay qualified expenses.

Read Also: Best Places To Work In The Federal Government

How Do We Receive Your Tfsa Information

If you disagree with any of the information on your TFSA Room Statement, or TFSA Transaction Summary, such as dates or amounts of contributions or withdrawals which your TFSA issuer has provided to us, contact your TFSA issuer. If any information initially provided by the issuer about your account is incorrect, the issuer must send us a revised record so that we can update our records.

You can view your TFSA Transaction Summary online. Go to My Account for Individuals to see all the contributions and withdrawals made to your TFSA.

Using Asset Placement To Your Advantage

Investing in tax free bonds

One way you can arbitrage the tax code is to use a strategy called asset placement, which is putting the right asset in the right vehicle to maximize benefits and minimize your tax burden.

For example, you wouldn’t choose to own tax-free municipal bonds inside of a tax shelter such as a Roth IRA, because those assets are already tax-protected. You’d be better off buying the higher-yielding corporate bonds for use in your IRA, as those bonds are exempt from federal and state taxes while within the protective confines of that special account.

Non-profit organizations, charitable institutions, and certain pools of capital, such as endowment funds for higher education, are likely going to have little use for tax-free municipal bonds, as they’re almost always going to be able to find a better deal elsewhere.

On the other hand, your taxable brokerage account would be a good place to put tax-free municipal bonds in order to take advantage of the tax exemptions.

Read Also: Dell Government Employee Discount Code

Is Savings Bond Interest Taxable

The interest that your savings bonds earn is subject to:

  • federal income tax, but not to state or local income tax
  • any federal estate, gift, and excise taxes as well as any state estate or inheritance taxes.

Using the money for higher education may keep you from paying federal income tax on your savings bond interest. Using EE Bonds for Education

Cancel Or Waive Penalties Or Interest

The CRA administers legislation, commonly called taxpayer relief provisions, that allows the CRA discretion to cancel penalties or interest when taxpayers cannot meet their tax obligations due to circumstances beyond their control.

The CRAs discretion to grant relief is limited to any period that ended within 10 calendar years before the year in which a request is made.

For penalties, the CRA will consider your request only if it relates to a tax year or fiscal period ending in any of the 10 calendar years before the year in which you make your request. For example, your request made in 2018 must relate to a penalty for a tax year or fiscal period ending in 2008 or later.

For interest on a balance owing for any tax year or fiscal period, the CRA will consider only the amounts that accrued during the 10 calendar years before the year in which you make your request. For example, your request made in 2018 must relate to interest that accrued in 2008 or later.

To make a request, fill out Form RC4288, Request for Taxpayer Relief Cancel or Waive Penalties or Interest. For more information about the cancellation of penalties or interest and how to submit your request, go to Taxpayer relief provisions.

Read Also: What Is The Government Program Called Harp

More articles

Popular Articles