When it comes to the question of tax free interest there are two ways in which these would be available as a benefit for the individual. There can either be a limit that is set upto which specific types of interest would not have any tax levied on them or it could that there is no such limit present. The individual has to check if the instrument where they are making the investment has any limit present and then they should make their respective calculations. Here is a closer look at the issue along with some of the instruments where this is available and how the investor can deal with them.
Tax free limit
There are some instruments that are present where the income earned is tax free but there is a limit to which this would be applicable. The manner in which this works is that upto the limit specified there is no tax on the interest but once the figure crosses this limit then the amount would be added to the taxable income of the individual. One such area where the interest is tax free to a limit is the savings bank account. In case of this account the interest earned during the year upto Rs 10,000 is tax free and if the income is above this level then the additional amount would be taxed. This would ensure that the individual does some planning to ensure that there is enough interest generated from the savings account that can reach up to this limit. The risk here is that in the process of earning tax free returns the actual yield of rate earned for the individual could be going down.
The other area where there is a limit that the individual would experience is that with the post office savings account interest. Here the amount that is tax free is only Rs 3,500 for an individual where the account is in an individual name and Rs 7,000 where this is a joint account. This means that keeping too much money in the post office savings bank account might not be wise as the excess return would end up getting taxed in the hands of the individual.
Tax free without limit
There are other options where the individual would get the benefit of tax free income but there would not be any limit on the amount of income that could be earned this way. This is one of the best options for the individual in the sense that they do not have to worry about the extent of the figure that is actually earned from this particular area. This would ensure that someone who has a large amount of corpus can actually plan their finances in such a manner that they would end up with a large part of tax free income. This is significant in the sense that there is a large amount of freedom for the individual to plan their finances in a proper manner.
There are a lot of tax free infrastructure bonds that are being launched since the last few years and these are the instruments where the individual would not have to worry about the amount that they invest in these bonds as well as the amount of income that is actually earned from these. This is because there is no limit to the extent that would actually be tax free in the hands of the individual and hence this gives a lot of leeway to them about the amounts that they actually want to channelize in this area. The problem with the tax free bonds is that they might not be available for investment when required if a new issue is not open or that there is not much liquidity available in the secondary markets.