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Tax Free Bonds

What is a tax-free bond?

  • Security issued by a company, financial institution or the government.
  • Offers regular or fixed payment of interest in return for borrowed money for a specified period.

Why are these bonds called "tax-free"?

  • You don’t have to pay any tax on the interest earned from these bonds (Income Tax Act, 1961).

Who provides tax-free bonds?

  • Government-backed entities
  • Public undertakings, such as IRFC, PFC, NHAI, HUDCO, REC, NTPC, NHPC, Indian Renewable Energy Development Agency (IREDA)

How do tax-free bonds work?

  • Tenure: You can invest for up to 10, 15, or 20 years – it’s your choice.
  • Liquidity: You can easily sell your bonds any time before maturity.
  • Safe investment option:You can be sure of receiving the promised regular interest.
  • Tax-exempted:You are not required to pay any taxes on the interest you earn.
  • Demat account is optional:You can hold these bonds in physical form, too.

Let’s look at an example to understand this better

Though the interest received from these bonds is non-taxable, any profits derived by selling these bonds in the secondary market are liable to taxes.

Who is eligible to invest in tax-free bonds?

  • Retail Individual Investors (RIIs) - Including members of Hindu undivided family (HUF) and Non-Resident Indians (NRIs).
  • High Net-worth Individuals (HNIs) - who have a low-risk appetite and can invest up to Rs. 10 lakhs.
  • Qualified Institutional Buyers (QIBs) - who have been defined under the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000.
  • Corporate, trusts, co-operative banks, regional rural banks.

How does one invest in tax-free bonds?

  • You can avail these bonds in physical form as well as in Demat mode.
  • If you are investing in tax-free bonds during the public issue, you have the option to apply online as well as offline for it.
  • If you are investing in tax-free bonds after the public issue, you can invest via your trading account, just like you invest in shares..

Note: Currently, there is no tax-free bond issue in the primary market. If anyone interested can invest through the secondary market.

Why invest in tax-free bonds?

  • Tax-free income
  • Low risk
  • Easy liquidity
  • Demat optional
  • Ratings by various agencies available