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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Debt Products

Which of the following is a feature of the taxation of interest on tax-free bonds issued by specified public sector entities, such as those of certain infrastructure and housing finance bodies, held by a resident individual?

Interest on notified tax-free bonds is exempt from income tax for the holder, but any capital gain on selling the bonds in the market remains taxable under normal capital gains rules. The exemption does not extend to sale proceeds.

  1. AInterest is exempt from income tax under the specific provision, though capital gains on sale are taxableCorrect
  2. BInterest is taxed at a flat 10% with no TDS
  3. CInterest is taxed at slab rate but TDS is not deducted
  4. DInterest is exempt and sale proceeds are also fully exempt

Explanation

Interest on notified tax-free bonds is exempt in the holder's hands. However, a gain on selling these bonds in the market is a capital gain and is taxable under the usual rules. So the exemption covers interest only, not sale gains.

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