Tax free bonds

Contents of article: Tax free bonds

  • Meaning
  • Risk involved
  • Interest rate 
  • Benefits
  • Examples
  • How to buy/ From where to buy 
  • Conclusion: Should I buy 

 

Meaning

Tax-free bonds are issued by the government with the aim to raise funds for different purposes. These come with a long-term maturity period of 10, 15, and 20 years. All interest earned is exempt from taxation.

 

Risk involved

These are the safest forms of investment as these are issued by government enterprises.

Interest rate 

The interest on these bonds is earned annually, and the Central government determines it. Generally the interest rates range between 7.3% to 7.5% per year.

 

Benefits

The advantages of tax-free go beyond the fact that these bonds give you tax-exempt interest. Here’s why you should invest in tax free government bonds:

  1. Assured income: The interest you earn on these bonds is assured every year. You stand to earn tax-free income every year, apart from the principal that will be returned to you on maturity. Only Indian nationals and Hindu Unified Family are allowed to purchase these bonds.
  2. Safety: These bonds are backed by the government of India, which means the likelihood of default is low. Even if a company you bought bonds from goes bankrupt then, its assets will be liquidated. And as bondholders, you will get your investments back.
  3. Easy trade: The tax free bonds are listed on the stock market. So you can sell your bonds at the market price when the prices appreciate. You stand to benefit in any market appreciation.
  4. Higher profit for higher tax bracket: These bonds are an ideal investment option for high net worth individuals. So if you fall in the 30 percent or above tax bracket, you stand to gain more. Additionally there is no upper limit to investment in these bonds.

 

Examples

Some of the bonds are issued by Power Finance Corporation, NTPC Limited, Indian Railways Finance Corporation Limited, Rural Electrification Corporation, National Highways Authority of India, etc.

 

How to buy/ From where to buy tax free bonds

Investors can buy these bonds when the government opens a subscription. However, these bonds are available only for a short time. You’d have to complete KYC and submit PAN details for receiving the bonds through an online or offline process.  These bonds are also available for trading post-issuance in the secondary market and traded like equities through trading accounts. 

 

Conclusion

They are a good option for anyone looking for a fixed tax free income from investments. One of the biggest benefits of tax-free bonds is there is no risk involved. Plus, one can enjoy a tax-free return of long periods like 10-20 years. So one can enjoy a regular annual income. 

 

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