Tax-free-bondsThe Indian investment market has seen many changes in recent years. A lot of new additions that offer good returns and at the same time provide higher tax-benefits are becoming favourable among most of the investors who are looking for tax saving investments. Amongst all, Tax-free bonds have emerged as a popular option which not only offers high returns but save on your taxes too. Let’s understand the concept of Tax-free Bonds in detail.

Tax-free Bonds: Meaning

Tax-free bonds are those debt security investments that are mostly issued by government enterprise. As these investments need government approval, so they mostly reduce the risk of non-payment of interest. A Tax-free bond comes with a long-term maturity period that ranges between 10 to 15 years to 20 years. Their rate of interest is fixed and the returns earned from such investments can be invested in various infrastructural developments.

So, when an individual invests in Tax-free bonds, they can directly enjoy various tax-benefits under Section 10 (15) (iv) (h) of the Income Tax Act, 1961. At the same time, one can also save on their TDS deduction from the interest earned. But do remember, that the deduction can only be availed on the interest earned and not on the principal amount invested in these bonds.

Tax-free Bonds: Features

  • Tax-free bonds offer a rate of interest which is 6.5% and the interests can be gained annually. Most of the time it is fixed, however, this interest rate can be changed as per the government regulations.
  • The risk factor is much low.
  • Tax-free bonds offer good benefits to the high tax bracket investors. These include trusts, co-operatives, HUF members, NRIs, HNIs, etc.
  • As said above, the lock-in tenure ranges from 10-20 years. However, you can withdraw the amount before the maturity period.
  • Investments in Tax-free bonds can only be made via Demat accounts or the stock market.
  • Returns on the bonds depend on the buying price. As they are traded in low volumes and generally caters to very few buyers and sellers.

Tax-free Bonds: Examples

In India, many PSUs (Public sector undertakings) offer Tax-free bonds. Some of the best known amongst them are NTPC Limited and Indian Railways, National Highway Authority of India, Rural Electrification Corporation, Indian Renewable Energy Development Agency, Housing, and Urban Development Corporation and Power Finance Corporation.

Tax-free Bonds: How to Invest?

  • For investment in Tax-free bonds, firstly you have to open a Demat account or in physical form. In case of physical form, one has to submit PAN card number beforehand.
  • Keep in mind that the subscription period for the investment is open only for a specific period of time and not throughout the year.
  • When the government issues such as bonds, an investor can do the trading by applying it online or offline. On the other hand, if an investor invests in tax-free bonds after the Government issues it already, then they can make investments via trading Demat account.

Tax-free Bonds: How do they differ from Tax-saving Bonds?

  • In tax-free bonds, the interest rate is exempted from tax on the other hand; in case of tax-saving bonds, the initial investment is tax-exempted.
  • Tax exemptions come under Section 10 (15) (iv) (h) of the Income Tax Act in case of tax-free bonds, on the other hand, an individual can enjoy tax-benefits under section 80CCF of the Income Tax Act.
  • Rate of interest is higher in case of tax-free bonds.
  • In tax-free bonds, an individual can invest up to Rs 5 lacs; on the other hand, an individual can invest up to Rs 20,000 in tax-saving bonds.
  • You cannot withdraw invested amount before the maturity period. However, in case of tax-saving bonds, an individual can withdraw the amount after 5-7 years.