Indians paid ₹9,60,764 Crores of income tax in FY 2022-23, a figure 24.23% higher than last the previous financial year. That said, hikes in salaries have also increased one’s tax liabilities. However, individuals can opt for certain tax-saving investments that can reduce their tax outgo. 

 

To address both these needs, you can buy tax-free bonds, which allow you to earn tax-free interest income. Issued by government entities, these bonds reduce the risk in your portfolio, while also giving stable returns. 

 

As such, tax-free bonds are suitable if your investment goals involve capital safety and tax advantage. Here are the features and benefits of investing in tax-free bonds.

 

A Guide to Investing in Tax-Free Bonds

  • Tax-Free bonds are fixed-income securities issued by government-owned entities such as PSUs, to raise funds for various national welfare projects. For investors, these bonds come with a tenor ranging 10-20 years during which you receive tax-free interest income. 

  • At maturity, you get back your principal investment. Tax-free bonds for senior citizens and retirees present the opportunity to receive a regular income without additional tax burden. 

  • Any individual, bank or corporate can invest in such bonds. However, HNIs (High Net-worth Individuals), HUF (Hindu Undivided Families), co-operative banks, and other investors who come under high tax brackets mainly prefer to invest in these bonds. This is done in order to benefit from investments without increasing tax liability.

  • An important aspect is that tax-free securities cannot be redeemed before maturity. However, you can trade these in the secondary market, and capital gains from the sale of tax-free bonds are taxable.

Key Features of Tax-Free Bonds

If you are planning to invest in tax-free bonds, here are its defining features you should consider:

●   Regular Fixed Income

Such bonds allow you to enjoy a guaranteed income, at an interest rate specified at the time of purchase. This implies that the income is not vulnerable to market fluctuations.

●   Long Investment Horizon

Tax-free bonds have a maturity period of around 10-20 years, during which they are locked in. This means that you cannot redeem these bonds before that. However, you can opt to sell these bonds in the secondary market if you are in need of quick funds.

●   Lower Interest Rate

Since such bonds are government-backed, they are considered to be extremely secure investments. Due to the high security and long tenure, interest on tax-free bonds is around 5.50% to 6.50%. This is lower than other bond offerings.

Why to Choose Tax-Free Bonds

You can benefit in a number of ways by investing in tax-free bonds. To name a few: 

●   Tax Exemption

The annual interest you earn on such bonds is 100% tax-exempt, therefore Tax Deducted at Source (TDS) is not applicable to tax-free bonds. However, it’s advised that individuals declare their income since the principal amount invested in the tax-free bond is not eligible for tax deductions u/s 80C.

●   Low Risk

As tax-free bonds are issued by government-owned entities, they have very minimal risk of default. If you are a risk-averse investor, this highly secure bond is a good option for you.

●   Beneficial for High-Income Taxpayers

Taxpayers belonging to the higher tax slabs can benefit by parking funds in these bonds. Unlike FDs, this allows you to enjoy returns without any additional tax load.

How to Choose the Best Tax-Free Bonds

Once you decide to invest in tax-free bonds, you can check the list of tax-free bonds available in India. Make sure you study the issuer and issuer profile. Then, verify the yield or returns from the bond.

 

Finally, make a note of the maturity date so as to plan it in line with your liquidity requirements.


Overall, if you want regular income without the added tax burden, these tax-free government bonds are a great option. Open a Demat account through Bajaj Markets to start investing.

 

While tax-free interest income is attractive, make sure you do due research before investing in such bonds. You need to consider the lock-in period, comparatively lower interest rates, and the plethora of low-risk investment options available in the market, before you invest.

Disclaimer

You are being redirected to the third party web-application. However, we would want to appraise you that “Investments in debt securities are subject to market risks. Please read all the offer related documents/information carefully before investing."

FAQs on Tax-Free Bonds in India

How are tax-free bonds different from tax-saving bonds?

Only the interest earned on tax-free bonds is exempt from tax, while in the case of tax-saving bonds, the principal investment is eligible tax deduction. Tax-free bonds also have a lock-in period of 10-20 years, while these tax-saving bonds are redeemable in 5-7 years.

Which entities issue tax-free government bonds?

This type of bond is issued by Public Sector Undertakings (PSUs) and governments to gather funds for different projects of national importance.

Which PSUs commonly issue tax-free bonds?

NTPC Limited, Indian Railways, Rural Electrification Corporation, National Highway Authority of India, Housing and Urban Development Corporation, and the Power Finance Corporation are few prominent PSUs which issue tax-free bonds.

Do tax-free bonds have good liquidity?

You cannot redeem such bonds before the maturity period. However, you can trade tax-free bonds in the secondary market, allowing you to access liquidity.

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