Banks will not deduct tax at source on the interest and maturity proceeds of the 8% savings (taxable) bonds, 2003 issued by the government.

The Reserve Bank of India has instructed designated banks not to deduct tax at source (TDS) on these bonds, following the notification issued by the government in January this year.

Last year, the original notification for the 8 % savings bonds, had mentioned that tax would be deducted at source while making the payment of interest on non-cumulative bonds from time to time and cumulative bonds at the time of maturity. However, the notification overlooked the fact that the Income Tax Act provides for a tax deduction at source exemption on any interest payable or any securities of the central government or state government as defined in the Securities Contract (regulation) Act. Once this was pointed out, the government issued another notification in January. Prior to that, the RBI had instructed banks not to deduct TDS until December 2003.

For investors, while this may provide relief, as tax assessees, they will have to declare the interest income while filing their tax returns.