What are Tax-Free Bonds?

Tax-free bonds are fixed-income securities that are issued by government-backed institutions like the National Highways Authority of India (NHAI), Power Finance Corporation (PFC), and Indian Railway Finance Corporation (IRFC). In India, the tax-free bonds pay a fixed rate of interest. The interest earned from these bonds is entirely free from income tax under Section 10(15) of the Income Tax Act, subject to applicable conditions. They have long maturities, usually 10-20 years, and the bonds aim to offer stable and predictable returns. This article explains what are tax-free bonds, their advantages, features, and more.

Key Features and Benefits of Tax Free Bonds

The following are the key features and benefits of tax-free bonds.  

• Tax-Exempt Interest: These bonds are generally tax-efficient for high-bracket investors because the interest earned is completely excluded under Section 10 of the Income Tax Act, subject to applicable tax law. Also, no TDS is withdrawn.  
• Low Default Risk: These bonds, which are backed by government organisations including NHAI, PFC, REC, and IRFC, tend to provide credit protection as well as regular yearly payments. 
• Fixed and Predictable Returns: An annual fixed interest rate may provide steady long-term income for investors.  
• Long Maturity Tenure: These bonds can be suitable for investors looking for steady income over a longer period of time because they have a lock-in of 10–20 years. 
• Capital Protection: Since they are issued by government-backed institutions, principal repayment risk is generally minimal. 
• Issuance & transaction: Available in both Demat and physical mode, and can also be purchased through the secondary market. 
• Portfolio Stability: They may act as a steady, low-risk fixed-income component and help diversify equity-heavy portfolios. 
• Suitability: These bonds can be suitable for senior citizens,(High Net-worth Individuals) HNIs and those in higher tax slabs seeking safe, tax-efficient returns. 

Who Issues Tax-Free Bonds? 

In India, government-backed organisations issue tax-free bonds to raise long-term funds for nation-building initiatives like infrastructure construction. These companies tend to provide great credit quality and little default risk because they are either entirely owned by the Indian government or function under particular ministries. Roads, housing, energy, power, and urban development are among the industries that typically use the govt tax-free bonds. Major Indian issuers of tax-free bonds are listed below: 

• National Highways Authority of India (NHAI) 
• Power Finance Corporation Limited (PFC)  
• Indian Infrastructure Finance Company Limited (IIFCL)  
• Housing and Urban Development Corporation Limited (HUDCO)  
• Indian Renewable Energy Development Agency Limited (IREDA)  
• Rural Electrification Corporation Limited (REC)  
• National Housing Bank (NHB)  
• NHPC Limited (National Hydroelectric Power Corporation Ltd.)  
• NTPC Limited (National Thermal Power Corporation Ltd.)  

Who Should Invest in Tax-Free Bonds?

Investors who want a long-term, stable, and tax-efficient income may want to consider tax-free bonds. They may be suitable for those in high tax brackets because the interest charged will not be taxed at all, as per Section 10 of the Income Tax Act. Such bonds can also fit the category of conservative investors, including elderly people, risk-averse investors, and investors who like predicting annual interest rates with minimal market fluctuations.  

Tax-free bonds may also serve as good alternatives to long-term financial goal investors since the maturities of the bonds are normally ten years and above. Like any other investment, suitability is based on the general financial objectives, the risk profile, and the portfolio strategy. To ensure that tax-free bonds are used as a supplement to long-term wealth planning, investors can seek advice of a financial counsellor. 

How to Invest in Tax-Free Bonds 

Here’s how to invest in tax-free bonds: 

Step 1: Select an investment broker: Investors must first decide on a reliable bank, broker, or financial system that has a good reputation in the market.  

Step 2: Find out the available tax-free bonds: Study the issuer, interest rate, maturity term, credit rating and other main details to make a wise choice.  

Step 3: Eligibility: Investors must ensure that they meet the minimum requirements established against them. Majority of tax-free bonds are usually open to everybody.  

Step 4: Open a Demat account: A Demat account is required to hold tax-free bonds. An investor must open one with the chosen institution if they do not already have it.  

Click here to open a demat account with BlinkX. 

Step 5: Apply for the bond: Investors can submit the application online or through the institution’s branch for the specific bond they want to buy. 

Step 6: Transfer funds: Add the required amount to the Demat-linked account to complete the purchase. 

Step 7: Wait for allotment: The allotment process takes a few days. Once allotted, the bonds will appear in the Demat account. 

Step 8: Investment tracking: Investors must closely track the status of their bond and news via their Demat account or through news alerts provided by their institution. 

Step 9: Interest payouts: Interest is usually paid out every six months or once a year and deposited directly into the account and it is normally tax-free. 

Step 10: Hold until maturity: Tax-free bonds are long-term securities and holding them to term might enable the investor to receive all the benefit. 

Difference Between Tax-Free Bonds and Tax-Saving Bonds 

The table below shows the differences between tax-free bonds and tax-saving bonds: 

Disclaimer: The above information is prepared for general awareness and is not tax, investment, or legal advice. The tax regulations and allowances can differ according to the existing laws and personal conditions. 

Conclusion 

Tax-free bonds are low-risk, long-term investment options issued by government-supported companies such as NHAI, PFC, and IRFC. They may suit investors in the higher tax brackets since they generally provide fixed, predictable returns and are entirely tax-free under current tax legislation. These bonds can be suitable for senior citizens, cautious investors, and those looking for a steady income because of their extended maturities, low default risk, and capital protection. Investors may use an online stock trading app, which makes it simple to purchase, track, and manage assets digitally.