Tax-Free Bonds – Meaning, Features, and How to Invest

What are Tax-Free Bonds?

Tax-free bonds are government-owned securities that offer interest income exempt from income tax under Section 10 of the Income Tax Act in India. These bonds are considered a low-risk investment with a long-term maturity period, typically extending beyond 10 years. The funds raised through these bonds are usually invested in government projects, such as infrastructure development. Municipal bonds are a prime example of tax-free bonds, providing investors with fixed interest and a risk-free investment avenue.

Tax-Free Bonds for Investment

Here are some notable tax-free bonds available for investment –

1. NTPC

○       Price – ₹ 101.8346

○       Coupon – 7.36%

○       Rating – AAA

○       Yield – 5.8%

2. IRFC

○       Price – ₹ 101.7861

○       Coupon – 7.32%

○       Rating – AAA

○       Yield – 5.75%

3. REC

○       Price – ₹ 101.7901

○       Coupon – 7.14%

○       Rating – AAA

○       Yield – 5.75%

4. IREDA

○       Price – ₹ 102.6037

○       Coupon – 7.53%

○       Rating – AAA

○       Yield – 5.75%

5. IIFCL

○       Price – ₹ 112.799

○       Coupon – 8.73%

○       Rating – AAA

○       Yield – 5.7%

6. PFC

○       Price – ₹ 102.09

○       Coupon – 7.36%

○       Rating – AAA

○       Yield – 5.7%

7. NABARD

○       Price – ₹ 102.607

○       Coupon – 7.29%

○       Rating – AAA

○       Yield – 5.7%

8. HUDCO

○       Price – ₹ 106.535

○       Coupon – 7.19%

○       Rating – AAA

○       Yield – 5.7%

More About Tax-Free Bonds and Government Securities

Paying tax on interest income is a major concern for many investors in India. Tax-free government securities are an excellent instrument for safe investing, particularly appealing to high-net-worth individuals (HNIs) who fall into higher tax brackets.

Investing in Tax-Free Bonds

Tax-free bonds can be traded in physical form or via a Demat account. Investing in these bonds is straightforward and offers significant rewards.

Subscriptions are typically open for a specified period, during which investors can apply. The required KYC details include Aadhar card, PAN, Passport, or Voter ID. Trading in tax-free bonds is similar to trading shares in the stock market.

Redemption and Tax Implications

Tax free bonds can be redeemed upon maturity, typically between 10 to 20 years. While they cannot be withdrawn early, they can be traded on stock exchanges. Any capital gains from selling these bonds are subject to capital gains tax under Section 112 of the Income Tax Act, 1961. Short-term gains (within one year) are taxed as per the investor’s income tax slab, while long-term gains (after one year) are taxed at 10% without indexation benefits.

Features of Tax-Free Bonds in India

• Tax Exemption – Interest income from tax-free bonds is entirely exempt from tax, and no TDS is applicable.
• Low Risk – These bonds are backed by the government, ensuring low default risk.
• Long Tenure – Typically ranging from 10 to 20 years, providing extended interest income.
• Liquidity – These bonds are not easily liquidated, so investors should not need immediate access to the invested funds.
• Returns – Returns depend on the purchase price, with interest rates ranging from 5% to 5.5%.

How to Invest in Tax-Free Bonds?

Investors can trade tax-free bonds through a Demat account or in physical form. During public issues, bonds can be purchased either online or offline after completing KYC and submitting PAN details.

Difference Between Tax-Free Bonds and Tax-Saving Bonds

Feature	Tax-Free Bonds	Tax-Saving Bonds
Interest Income	Tax-exempt	Only initial investment is tax-exempt
Income Tax Act	Section 10	Section 80CCF
Interest Rates	Higher	Lower
Investment Limit	Up to Rs 5 lakh	Exemption up to Rs 20,000 per financial year
Maturity Period	10, 15, 20 years	Buyback clause for redemption after 5 or 7 years

Advantages of Investing in Tax-Free Bonds

• Tax Exemption – Interest income is exempt from tax under the Income Tax Act of 1961, with no TDS applicable.
• Longer Tenure – These bonds have tenures of 10, 15, or 20 years, providing long-term interest income.
• Interest Rate Income – Interest rates generally range from 5.50% to 6.50%, which is attractive considering the tax benefits.

Who Should Invest in Tax-Free Bonds?

Tax-free bonds are ideal for senior citizens, high-net-worth individuals (HNIs), Hindu Undivided Families (HUFs), cooperative banks, and other high-tax-bracket investors seeking tax-free income.

Save Tax with Tax-Free Bonds in India

Tax-free bonds are a smart choice for investors looking to save on taxes. Online platforms like Dezerv make investing in tax-free bonds easy, offering a streamlined process to create accounts, complete KYC, and start investing.

Tax-Free Investments in India

Investing in tax-free bonds can diversify your portfolio, balancing risk and reward. With long-term maturity and minimal default risk, tax-free bonds are suitable for investors willing to commit their funds for an extended period. While returns may be lower compared to corporate bonds, the tax benefits make them an attractive option.