Tax Free Bonds: Types, Benefits & How to Buy Tax Free Bonds

What is Tax Free Bonds?

Tax free bonds are usually the government securities wherein the interest is fully exempted from the Income Tax and shall not form part of the Total Income as per provisions under section 10 (15) (iv) (h) of I.T. Act, 1961.

In general, tax free bonds are considered a low-risk investment opportunity for investors. These bonds constitute a long-term maturity of 10 years or more. The money collected by the government from these bonds are usually invested in infrastructure and housing projects. Municipal bonds are one such examples of tax-free bonds where fixed interest rates are provided without any mere default.

Who issues these Bonds?

Tax-free bonds are generally issued by Government Backed entities to raise funds for a specific objective. The bonds have very low default risk.

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 tax payers.

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.

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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 India

Tenure – Tax free bonds have extended long term tenures of 10, 15 or 20 years.
Interest rate – Interest rate ranges from 5.50% to 6.50%, which is fairly attractive subject to the tax exemption on interest for these bonds.
Low risk- These bonds offer low risk as chances of default on principal and interest payments are very low as these are issued on behalf of the government. Tax-free bonds offer capital protection and a fixed monthly income which makes it a quite safe investment.
Liquidity- Not easy to liquidate as such bonds has an extended lock-in period.
Issuance and Transaction - Tax-free bonds are held through Demat account or in physical mode. These bonds are also be purchased from the secondary market.

Why invest in Tax-free Bonds India?

Tax-free Bonds are a good choice for investors specifically for the senor citizens in need for fixed income. The default risk in Tax-free Bonds is minimal due to its longer tenure.

Tax-free Bonds India can prove to be a good instrument for investments. As the name suggest, it is free from the tax liability on the interest income earned.

Advantages of Investing in Tax-free Bonds

Exemption from Tax

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

Longer Tenure

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

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.

Who should invest in tax-free bonds?

With longer tenure, low-default risk and getting fixed income for an extended period makes an excellent choice for investors like senior citizens to invest in such bonds.

Those investors who come in the rage of the highest tax-bracket can invest in such tax-free bonds.

High net-worth (HNI) individuals, trusts, HUF members, co-operative banks, and qualified institutional investors are also eligible to invest in tax-free bonds.

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Frequently Asked Questions

What makes Tax-free bonds a good investment tool?

The benefit of tax exemption, longer tenure, good interest rate, and more makes Tax-free bonds a good investment tool for different type of investors.

Can individual investor invest in tax-free bonds?

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

Is it safe to invest in tax-free bonds?

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

Are Tax-free bonds non-taxable?

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

What bonds types are non-taxable?

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

Can I seek expert advice on bonds at BondsIndia?

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

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