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Bond name

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CRISIL
AAA
7.53%Annually10 May 30
CRISIL
AAA
8.43%Annually16 Nov 23
CRISIL
AAA
8.66%Annually16 Dec 33
INDIA
AAA
7.14%Annually11 May 25
INDIA
AAA
Variable CouponAnnually25 Oct 23
INDIA
AAA
5%Annually30 Sep 26
CRISIL
AAA
8.18%Annually16 Nov 23
Unrated
15%subject to Availability of Funds09 Jul 23
CARE
AAA
(7.08/7.58)%Annually26 Mar 33
INDIA
AAA
8.37%Annually30 Aug 33
INDIA
AAA
5%Annually28 Feb 27
INDIA
AAA
Variable CouponAnnually16 Feb 28
INDIA
AA+
7.68%Annually21 Jan 36
INDIA
AAA
Variable CouponAnnually13 Jan 29
CARE
AA+
8.16%Annually13 Mar 24
INDIA
AA+
7.43%Annually21 Jan 36
INDIA
AAA
6.89%Annually11 May 25
Unrated
9.76%Quarterly30 Jun 33
INDIA
AAA
8.19%Annually23 Aug 33
INDIA
AAA
8.76% (REFER REMARKS)Annually13 Jan 24
1-20 out of 297

Tax-free bonds in India

Tax-free bonds are bonds with interest payments (coupons) that are tax exempt. Tax exemption is a big advantage because taxable bonds are subject to taxation which reduces the post-tax return of the bonds significantly.

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 just be Rs. 4.8.

It is important to note that there have been no new issues of tax-free bonds since 2015. The tax-free bonds available in the market are issued before 2015 and available on exchanges.

How do tax-free bonds work?

Tax-free bonds work like 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 you are not required to pay any tax on it.

How to redeem tax-free bonds?

Tax-free bonds cannot be returned to the issuer (a government-backed PSU) before the maturity date. However, it can be traded on stock exchanges. It is important to note that if a tax-free bond is sold before maturity date, capital gains tax applies.

Income tax section under which tax-free bonds are exempted

Section 10(15) of the Income Tax Act applies on 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 Highways Authority of India is a government agency that functions under the Ministry of Road Transport and Highway. The NHAI requires money for managing and executing highway projects. One of the ways it collects the funds required is by issuing bonds.

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%. NHAI tax-free bonds were last issued in 2015-16.

REC tax-free bonds

REC or the Rural Electrification Corporation is a Maharatna company administered by the Ministry of Power. The REC is engaged in offering 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 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 should consider tax-free bonds for investing. Additionally, since the tax is exempt on these bonds, investors in the higher tax brackets should consider investing in tax-free bonds to enjoy better post-tax returns. Further, since the credit rating of these bonds is highest (AAA) and there is government support, low risk investors can also consider tax-free bonds for exposure to fixed income instruments.

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 bond is sold before 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 bond has increased (mostly happens due to 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 the risks can be eliminated by holding the bonds until maturity.

Advantages of investing in tax-free bonds

The biggest 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 corporations that issue these bonds are supported by the government.

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. First thing to check is the issuer and issuer profile. Next, it is important to check the YTM of the bond. Finally, check the maturity date. It is important to avoid early liquidation of the bond since that exposes the bonds to liquidity and interest rate risks.

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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.