Tax Free Bonds

What are benefits of Investing in Tax-free Bonds?

Tax-free bonds come with a lot of attractive benefits. Listed below are the major benefits offered by tax-free bonds:

1. Investors can enjoy tax benefits by investing in tax-free bonds. These bonds are 100% tax-free. The interest income received from these bonds is calculated as a part of your total annual income.
2. You get higher interest rates on your invested amount. Tax-free bonds provide good returns on your investments.
3. Interest is paid on these bonds annually. It gets directly credited in the bank account of the investor.
4. Tax-free bonds provide steady returns for longer terms such as 10 and 20 years.

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

There are a few differences between tax-free bonds and tax saving bonds. The major differences between tax-free bonds and tax savings bonds are:

Things to Remember before Opting for Tax-free Bonds

Wisely chosen bonds can act as safe haven for your investments. In this case, tax-free bonds can serve as an ideal investment tool as they are totally free from tax payment. However, before investing in tax-free bonds you need to know the basic facts about tax-free bonds and how they function:

1. Tax-free bonds come with a lock in-period of 10 to 20 years. The amount invested in a tax-free bond cannot be withdrawn before the expiry of applicable lock-in period.
2. The interest income earned from these bonds are completely free from income tax.
3. Tax-free bonds can be transacted in stock exchanges. Any investor can buy and sell these tax-free bonds on the stock exchanges.
4. Although the interest earned by investing tax-free bonds is not taxable, any capital gains received from selling these tax-free bonds in the secondary market are taxable.
5. Tax-free bonds are issued both in demat format and physical mode.
6. Credit risk or the risk of non-payment is very low in tax-free bonds as these bonds are mostly issued by the government enterprises.
7. Interest rates on tax-free bonds ranges between 7.3% to 7.5% per year. However, these rates are dependent on the ratings on bonds given by credit rating agencies.

How to Invest in Tax-free Bonds?

Investors can buy these tax-free bonds either in physical format or demat form. The subscription period for investing in tax-free bonds is open for a limited period of time within which you need to buy these bonds. An investor needs to furnish his/her Permanent Account Number (PAN), if the bonds are purchased in the physical format.

Who can Invest in Tax-free Bonds?

The following categories of investors can invest in tax-free bonds:

1. Qualified Institutional Buyers who have been defined under the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000.
2. Limited liability partnerships, partnership firms, trusts, co-operative banks, regional rural banks, corporates and other authorized entities.
3. Retail individual investors who include members of Hindu Undivided Family and Non-Resident Indians.
4. High net-worth individuals which include those investors whose risk appetite are low and can invest up to Rs.10 lakhs.

Thus, the tax-free bonds are ideal for modest risk appetite investors as well as high net-worth individuals who are looking for a steady source of annual income, and for those who can afford to lock-in their capital for longer tenures.