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Tax on Bonds

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Interest income from Bonds, such as the 8% interest offered by Reserve Bank of India (RBI), is taxable in the hands of depositors. Only tax-free bonds are an exception and the tax-free nature of such bonds will be clearly mentioned.

In regard to taxable bonds, the income has to be shown under "Income from Other Sources".

There are two accounting methods that we generally follow: cash system or mercantile system.

In the cash system of accounting, the interest on the bonds will be taxable only in the year of receipt.

In case the mercantile system, the interest on the bonds will be taxable on accrual basis every year, even though you do not actually receive the interest.

Futher, for interest above Rs. 10,000 per year, a Tax Deduction at Source (TDS) will be done. In cases where TDS is done, it is better to follow the mercantile system of accounting.

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