Advantages of investing in tax free bonds (India)


Tax free bonds are fixed income instruments mostly issued by government ventures with a coupon rate of interest for a fixed tenure.

Tax free bonds are one of the most popular investments in India.

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Tax free bonds are issued for long term with a horizon of 10 to 15 years and the interest on tax-free bonds is fully exempted from income tax.

Irrespective of the income slab one need not to pay any income tax on the interest earned from these tax-free bonds. But remember, the interest rates of tax-free bonds are linked to the current rates of government securities.

These bonds are suitable for investors, who are looking for a steady income annually and one can afford to lock in their capital for the long term.

The interest on these tax-free bonds is paid annually and credited directly in your bank account.

Some of the most popular tax free bonds are HUDCO, IRFC, NTPC, PFC, Indian Railways Finance Corporation (IRFC) etc.

If you sold these bonds within one year of subscription, you have to pay Short term Capital Gain at the normal rate and if it is sold after one year – you have to pay long-term capital gains which are taxed at 20% with indexation and 10% without indexation.

Liquidity is very low in tax-free bonds as these are traded in secondary market through stock exchanges.

One can subscribe to new tax free bonds when it is open for subscription. Usually the issues will be open for few days only.

These tax-free bonds can be bought in physical form or through your demat account. The subscriber has to furnish his/her PAN card to the issuer of the Bonds.

If you miss buying these bonds during the Public issue, you can still buy from secondary market through stock exchanges.

These tax-free bonds are suitable for investors in higher tax brackets as these bonds mostly earns better post-tax return than from Fixed Deposits. But remember, the fixed deposits scores over tax-free bonds in terms of liquidity.

One can consider investing some portion of the investment towards these bonds as these provides steady annual income.

Finally always remember that ANY INVESTMENT SHOULD MATCH YOUR LONG TIME FINANCIAL GOALS. Hence, invest in these tax-free bonds after properly evaluating your tax liability and long-term goals.

Hope you find above information useful. Do share your views below.

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1 Comment
  1. RupeeVest says

    Thank you for a detailed article.