What are Tax Free Bonds?

Tax free bonds are generally government-owned securities wherein the interest amount derived by the investor is fully exempted from the Income Tax and shall not form part of the Total Income as per provisions under section 10 of the Income Tax Act India.

Tax free bonds are generally considered a low-risk investment opportunity for investors. Such bonds generally have a long-term maturity of 10 years or more. The money collected by the government from these bonds is usually invested in government projects like infrastructure etc. The foremost example of tax free Bonds is Municipal Bonds which provide the investor with the advantage of fixed interest and open new avenues for risk-free investments.

Best Tax Free Bonds for your investment

Top Bonds




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Best Corporate Bonds for your investment




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More About Tax-free Bonds and tax free government securities

Paying tax on the income earned as interest on the long or short-term investment made is a big concern for many of the investors in India. The option to diversify your portfolio can help share risks and reward. The tax free government securities are also a good instrument for safe investing.

The tax free government securities tend to be the first choice of HNI customers coming in the category of high taxpayers.

  • Tax free investments in India
    Tax-free bonds have a trading mechanism that permits trading via Demat account or in physical form. However, investing in such tax-free bonds is quite simple and reaps more rewards. One should note that the subscription period is open for a specified period on opting for such tax-free bonds.
    For trading in tax-free bonds, you must submit your KYC details such as Aadhar card/PAN/Passport/Voter ID details for verification. Upon verification, trading is freely accessible to you via your Demat account. Hence, trading in tax-free bonds is similar to trading shares in the stock market.
  • Redeem your Tax-Free Bonds
    The redemption procedure of tax-free bonds is fairly simple, subject to the completion of its tenure. However, you do not have a provision to withdraw your tax-free bond before 10-20 years, but only it is available for tradable purposes on stock exchanges with other investors. A considerable growth can be observed in tax free investments in India in the last few years.
  • The investor issuing a tax-free bond in the first instance cannot repurchase it. Furthermore, the profit you make on tax-free bonds after the sale is also taxation under the provisions of Section-112 of the Income Tax Act, 1961.
  • Hence, the capital gains are obtained on selling these tax-free bonds before one-year is accountable for taxation based on the investor’s income tax slab.
  • Trading it after one year will attract 10% long-term capital gains tax and upon which there is no-indexation benefit applicable over it. To sum up, tax-free bonds provide tax-free income at low risk.

Features of Tax-free Bonds in India

  • Exemption from Taxes – The tax income under Tax free bonds is completely exempted. As well as TDS (Tax Deducted at Source) doesn’t apply to such bonds. Resulting it proves to be a very good investment option for tax free interest income.
  • Risk Factors – The possibility of default payment on either principal or interest amount is considerably very low because the Government strongly backs these schemes.
  • Lock-in Tenure - Tax-free bonds generally have more extended lock-in periods ranging from a minimum of 10 years to a maximum of 20 years. The investor cannot withdraw their money before the maturity period or before the locking period.
  • Liquidity - The investor cannot benefit from liquidating the tax free bonds whenever they have the requirement for funds. So, keep in mind that you do not require the money you invest under these bonds in the near future.
  • Returns - Returns derived from these bonds are mainly dependent on the purchase price. The reason behind that these is traded at low volume and with a limited number of buyers.
  • Interest - The offered Interest rates on tax free Bonds to the investor generally range from (5 to 5.5%) which is quite attractive.

How to invest in Tax Free Bonds?

In tax-free bonds, the investors have trading options that allow them to trade bonds through a Demat account or in physical form. So, investing in these bonds is simple and highly beneficial as it generates tax free interest income.

The investor needs to submit their PAN details and do their KYC when opting for the physical format. At the time when the government issues bonds for the public, the investor can buy them either online or offline.

What is the difference between Tax free Bonds and Tax Savings Bonds?

Tax free Bonds Tax saving Bonds
The investor’s interest (income) is tax-exempted. Only the initial investment is tax-exempt.
It is stated under Section 10 of the Income Tax Act. It comes under Section 80CCF of the Income Tax Act.
Interest rates offered are comparatively higher than tax-saving bonds. The interest offered is lower compared to tax-free bonds.
Investors can invest up to Rs 5 lakh. Exemption of tax is only up to an investment of Rs 20,000 per financial year.
The maturity period is longer, like of 10,15 and 20 years The investor has a buyback clause – they can redeem investments after 5 or 7 years

Advantages of Investing in Tax-free Bonds


Advantages of Investing in Tax-free Bonds

Exemption from Tax

The income earned from the investment made in Tax-free Bonds is exempt from tax under the Income Tax Act of 1961. Also, no TDS applies to it.

Longer Tenure

Tax-free Bonds come with a tenure ranging from 10, 15, or 20 years. The longer tenure facilitates the interest income for a longer period useful for senior citizens.

Interest Rate Income

The rate of interest offered to investors holding tax-free bonds generally ranges from 5.50 to 6.50%, which is comparatively good considering the tax benefit. You can know the tax free bonds yield to plan your varied goals in your life.

Who should invest in Tax Free Bonds?

Tax free Bonds are an excellent choice for tax free investment in India. Tax free Bonds are the best choice for the investors like Senior citizens who are seeking tax free investment options. Other than that Tax free Bonds are best suited to the HNIs (High Net-worth Individuals), HUF (Hindu Undivided Families), Co- operative Banks, and investors who come under high tax brackets. Hence, tax free bonds are a great option to generate tax free income in India.

Save tax with tax free bonds in India

Tax free bonds are a very good option and choice for investors looking to save tax. You can learn about the tax implications applicable to tax-free bonds and accordingly plan your investments in tax free bonds.

Tax free investments in India

Investing today is a simple and easy task in the country. There are many online platforms like BondsIndia that help you park your surplus money in no time. Today Tax free investments in India can be done in a couple of minutes. You are required to create your online account, complete your KYC, and get set for your investment journey.

Investment in tax-free bonds can help you take the advantage of risk-reward. Tax-free bonds have a long-time maturity and hence is suitable for investors willing to park their money for long time. The maturity in case of tax-free bonds is generally 10 year or longer. It has minimal default risk. The return in comparison to corporate bonds is low in tax free bonds in India.

BondsIndia is a professional and user-friendly online platform designed especially for the fast navigation. You can have access to different products, Knowledge Centre, Research reports, and more helping you make informed decision.

If you are looking to explore bonds online at BondsIndia,

Frequently Asked Questions

The investor can buy tax free bonds easily by researching the current market price of the bonds they are interested in and deciding upon the quantity. And after deciding, the investor can place the order through the Broker.

Yes, individual investors including senior citizens can invest in tax-free bonds.

Yes, capital protection and a source of fixed income makes tax-free bonds a safe investment instrument.

Yes, under the Income Tax Act, 1961, the income earned from Tax-free bonds are non-taxable.

Only the local and state governments (i.e., municipal bonds) issued bonds are non-taxable.

Investing in tax-free bonds in India is an ideal choice for the investors looking to save tax payment.

Yes, you can book a 5-minute call with our experts at BondsIndia for an advice on investment in bonds.

BondsIndia is a professional and hundred percent dependable online platform to trade in bonds.

For information on the best tax-free bonds in India, consult our investment experts at BondsIndia.

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