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Tax Free Bonds

Tax-free bonds don’t require bondholders to pay tax on the interest received if the bond has been held until maturity. Tax-free bonds are issued by governments and public sector undertakings (PSUs) to raise funds for various projects of national importance. The government raises money through tax-free bonds to fund infrastructure and social welfare projects such as highways, railways, ports, urban and rural development, etc. Once issued, they can be traded on a stock exchange, and selling them on the exchange is the only way to liquidate them.

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Showing list of 255 bonds

Bond name

Rating

Coupon Rate

Payment Freq

Maturity Date

CRISIL
AAA
7.17%Annually01 Jan 23
INDIA
AAA
8.56%Annually09 Feb 28
INDIA
AAA
8.63%Annually24 Mar 29
INDIA
AAA
Variable CouponAnnually25 Oct 23
INDIA
AAA
8.75%Annually11 Dec 33
CRISIL
AAA
8.66%Annually16 Dec 33
INDIA
AAA
7.39%Annually18 Feb 31
INDIA
AAA
8.98% (REFER REMARKS)Annually24 Mar 29
CRISIL
AAA
8.93%(REFER REMARKS)Annually24 Mar 29
INDIA
AAA
8.01%Annually24 Sep 23
CARE
AAA
7.41%Annually15 Nov 32
INDIA
AAA
8.63%Annually11 Dec 28
INDIA
AAA
8.91% (REFER REMARK)Annually22 Jan 34
INDIA
AAA
7.07%Annually10 Jan 25
CRISIL
AAA
(6.88/7.38)%Annually28 Mar 23
CRISIL
AAA
7.22%Annually29 Nov 22
INDIA
AAA
8.86% (REFER REMARKS)Annually24 Mar 34
INDIA
AAA
7.68%Annually21 Jan 36
INDIA
AAA
Variable CouponAnnually13 Jan 29
CRISIL
AAA
8.88%Annually13 Jan 29
1-20 out of 255

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Tax-free Bonds in India

Tax-free bonds are bonds with interest payments (coupons) that are tax-exempt. Tax exemption is a significant advantage because taxable bonds are subject to taxation, significantly reducing the bond's post-tax return.

For example - If you invest in a tax-free bond that has a 6% interest rate, you will get Rs. 6 every year if you invest Rs. 100. You won't have to pay any tax on the interest payment. But if the bond is taxable, and let's say, you are in the 20% tax bracket, you will have to pay Rs. 1.2 as tax to the government, and your post-tax interest will be Rs. 4.8.

How do tax-free bonds work?

Tax-free bonds work like any other regular bonds. Once you invest in a tax-free bond, you receive interest payments at a specified frequency (generally, annually), and your principal is returned to you on the maturity date. The only difference is that you receive the interest payment in full (no TDS) and are not required to pay any tax on it.

How to redeem tax-free bonds?

Tax-free bonds cannot be redeemed before the maturity date. However, it can be sold in the secondary market. It is important to note that if a tax-free bond is sold before the maturity date, capital gain tax applies.

Income tax section under which tax-free bonds are exempted

Section 10(15) of the Income Tax Act applies to specific bonds (i.e., tax-free bonds) issued by government-backed PSUs which enjoy tax exemption.

Who can issue tax-free bonds?

Only a government-backed PSU can issue tax-free bonds. It is important to note that not all Bonds issued by the government-backed PSUs are tax-free. Only a few specific ones are. Here are some of the most common issuers.

NHAI Tax-Free Bonds

NHAI or National Highway Authority of India (NHAI) is a government-owned entity that functions under the Ministry of Road Transport, and Highway NHAI's mission is to develop, maintain and manage all the national highways powered by the Government of India. These Bonds come with a lock-in period of 5 years and provide interest at 5%.

The tax-free bonds issued by the NHAI had maturity periods ranging from 10 years to 20 years. Further, they offered interest rates in the range of 7% to 8.5%. 

REC Tax-free bonds

REC or the Rural Electrification Corporation, is a Maharatna company administered by the Ministry of Power. The REC offers financial assistance and distribution advisory to power companies.

REC tax-free bonds were last issued in 2015 with a maturity period of 10/15/20 years and an interest rate that ranged from 6.9% to 7.5%.

Who should invest in Tax-free bonds?

Tax-free bonds have a long tenure (generally, 10+ years). Senior citizens or investors seeking a stable income for long periods may consider tax-free bonds for investing. Further, since the credit rating of these bonds is the highest (AAA), and there is government support, low-risk investors can also consider tax-free bonds for exposure to fixed-income instruments. However, one should consider their financial and liquidity needs before choosing a tax-free bond. Tax benefit of investing in tax-free bonds

If a tax-free bond is held until maturity, the investor has to pay no tax on interest (there will be no capital gains if the bond is held until maturity)

Taxation implications if the bond is sold before the maturity date

If a tax-free bond is sold off in the market before maturity, taxation on interest doesn't apply, but capital gains (if any) will be taxed. Capital gains are the profits the investor makes if the price of the bond has increased (mostly happens due to a fall in interest rates)

  Tax-free bonds Tax saving bonds
Benefit to investor Interest payments are tax-exempt, i.e., investors don't have to pay Investments made in tax savings bonds reduce the investor's taxable income
Income Tax Section Section 10(15) Section 80CCF
Eligible issuers/bonds PSUs like Rural Electrification Corporation (REC) Government-approved issuers of infrastructure bonds
Limit No limit; all interest payments of tax-free bonds are tax exempt Investors can reduce their taxable income only up to Rs. 20,000

Risks of investing in Tax-free bonds

Tax-free bonds are generally safe from the credit default risk perspective. But they are not safe from liquidity risk, the risk that you may not get a fair price for your bonds if you sell them on the market. This may happen due to low demand for the bonds. They are also subject to interest rate risk if you wish to sell them. This is the risk of interest rates going up and your bond losing value. Both risks can be eliminated by holding the bonds until maturity.

Advantages of investing in Tax-free bonds

The most significant advantage of investing in tax-free bonds is that the interest payments are not subject to tax under section 10 of the Income Tax Act. Another advantage is that your bonds are subject to minimal credit default risk because the government supports corporations that issue these bonds.

How to identify the best Tax-free bonds?

New tax-free bonds have not been issued for a few years now. So, investors need to be careful while buying the best tax-free bonds from the market. The first thing to check is the issuer and issuer profile. Next, it is essential to check the Yield to Maturity of the bond. Finally, check the maturity date. It is necessary to avoid early liquidation of the bond since that exposes the bonds to liquidity and interest rate risks. Please note There is an investing limit in Tax-free Bonds - up to 5 Lacs.

Still got questions? We’re here to help.

By issuing tax-free bonds, the government wanted to attract investors to invest in bonds of some critical PSUs. However, as the bond market matured, there was no need to attract investors to invest in bonds of these important companies.
Tax-free bonds don’t attract tax while capital gains bonds help investors save long-term capital gains tax arising from the sale of a capital asset (property/land)
Yes, tax-free bonds are corporate bonds issued by specific PSUs.
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