TDS On Income From G-Sec: Expert Says Investors May Possibly Shift To Gilt Funds

FM Sitharaman said TDS is proposed on interest exceeding Rs 10,000 on Floating Rate Savings (Taxable) Bonds (FRSB) 2020 or any other notified security of the Central or State Governments.

New Delhi: Announcing the Union Budget 2024, the Finance Minister Nirmala Sitharaman proposed a 10 percent Tax Deducted at Source (TDS) on all central government securities, state government bonds, and state development loans (SDLs), effective from 1st October 2024. This means the interest you receive will be subject to a 10% deduction.

In her Budget speech, the FM said, "TDS is proposed on interest exceeding ten thousand rupees on Floating Rate Savings (Taxable) Bonds (FRSB) 2020 or any other notified security of the Central or State Governments."

Will the introduction of TDS on income from G-Sec and state bonds impact retail investors who often schedule their cash inflows based on anticipated interest earnings?

Vijay Kuppa – CEO of InCred Money told Zee Media, “The government aims to create parity among all investment instruments from a taxation perspective, as TDS is already levied on bank interest and corporate bond interest at 10%. TDS on corporate bonds was introduced in 2023, while government securities and state government bonds were previously exempt.”

Kuppa, further explaining this with a hypothetical situation said, consider a central government bond, such as the 07.18 GS 2033. If you purchase 1,000 units (after October 1, 2024) with a face value of Rs 100 each (totaling Rs 1,00,000), and the interest is paid semi-annually, you will receive a coupon payment of Rs 3,590. With the new 10% TDS, Rs 359 will be deducted, resulting in a net payment of Rs 3,231.

Impact of TDS on income from G-sec on retail investors long term or short term?

Kuppa said that the introduction of TDS in central government securities and state government bonds would affect investors who rely on regular interest income from these securities, potentially disrupting their cash flow. However, Investors will eventually adapt their investment strategies accordingly.

TDS on income from G-sec –Possiblity of investors shifting to mutual funds

There is also a possibility that investors might shift to mutual funds, particularly Gilt funds, which have government securities as their underlying assets, he added.