Tax Free Bonds

  • What are 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.

  • Who issues these Bonds?

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

    • Municipal bonds are one such examples of tax-free bonds where fixed interests rates are provided without any mere default.

  • Features of Tax-free Bonds

    • 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.

  • 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 eligible to invest in tax-free bonds.

  • How to invest in Tax-Free Bonds?

    • 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.

  • How to 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.

    • 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.

Top Issuers

National Highway Authority
of India


India infrastructure


REC Limited




Indian Railway
Finance Corporation




Power Finance


NTPC Limited



See More

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