TAX FREE BONDS

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Tax-free bonds are issued by a government enterprise to raise funds for a particular purpose. They offer a fixed interest rate and hence is a low-risk investment avenue. As the name suggests, its most attractive feature is its absolute tax exemption as per Section 10 of the Income Tax Act of India, 1961.Tax-free bonds generally have a long-term maturity of ten years or more. The government invests the money collected from these bonds in infrastructure and housing.

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Features of tax free bonds
These bonds have unique characteristics.

  • Interest : The interest on these bonds is earned periodically. All interest earned is exempt from taxation.

  • Tenure : Tax free government bonds usually come as long-term investment tools. You can invest in these bonds for up to 10, 15 or 20 years, depending on your needs.

  • Liquidity : You can trade these bonds at any time as per the ongoing market rate. However, any profit from the sale of these bonds will be taxed under the IT Act.

  • Form : You can hold these bonds in physical or dematerialised bonds. So you may choose to purchase using your demat account or purchase directly.

Benefits of tax free government bonds
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 :

  • Assured income : The interest you earn on these bonds is assured every year. You earn tax-free income every year, apart from the principal that will be returned to you on maturity.

  • Safety : These bonds are issued by large PSUs, backed by the government of India, which means the likelihood of default is low

  • Easy trade : The tax free bonds are listed on the stock market. So you can sell your bonds on the market price when the prices appreciate. You stand to benefit in any market appreciation.

  • Higher profit for higher tax bracket : Tax-free bonds are the right choice for investors falling in the highest tax bracket. Typically high net-worth (HNI) individuals, HUF members, trusts, co-operative banks, and qualified institutional investors prefer to invest in these bonds.