How And Why To Buy Tax-Free Bonds In India?

When it comes to investing, there are plenty of avenues that individuals can consider today. Among the various available options, tax-free bonds have garnered enormous popularity among Indian investors.

Here, we’ll understand how investors can allocate their funds to these financial instruments and why they’d want to opt for this option. But, before that, you must understand the concept of tax-free bonds.

Tax-Free Bonds – Meaning:

Tax-free bonds are fixed-income securities issued by public undertakings that carry a coupon rate of interest and a fixed tenure. As the name suggests, no tax is applicable on these financial instruments. In other words, investors do not need to pay any tax on the interest income, whatever may be the suitable tax slab.

These financial instruments are tradable on the stock exchange. Alternatively, one can allocate their savings to tax-saving bonds as well as digital gold and PMS via KredX’s online platform.

How Can One Invest In Tax-Free Bonds?

Companies that are backed by the government issue tax-free bonds, and the subscription period is open for a particular time frame. Interested investors can allocate their savings to these financial instruments by opening a demat account.

That said, individuals who prioritise convenience can consider KredX as an alternative. The entire process of subscription is digital. Moreover, investors can find various other bond options with different coupon rates and maturity periods on the platform. Thereafter, they can select one and initiate the necessary payment via one of the available channels for seamless investing.

Who Are Tax-Free Bonds Suitable For?

Tax-free bonds are suitable for investors who are looking for fixed income. They can allocate a lump-sum amount to this type of financial instrument that generates absolute returns. Since the interest income earned on these securities is not taxable, these are appropriate for individuals who fall in the highest income tax bracket. Accordingly, tax-free bonds are quite popular among institutional investors, high net worth individuals, etc.

Nevertheless, individuals must peruse the features of tax-free bonds before committing to the investment.

Features Of Tax-Free Bonds:

By investing in these financial instruments, investors can be privy to various features. Here are some of the reasons why they’d want to opt for this option:

  • Low Risk: Investors can earn guaranteed returns on a monthly or annual basis as these securities are government-backed. Accordingly, they are associated with low risk, i.e., there is little to no chance of default in this case.
  • Tax Exemption: No tax is applicable on the interest income earned from tax-free bonds. Moreover, there’s no TDS deduction as well. However, individuals must note that the investment amount does not qualify for a deduction per Section 80C of the Income Tax Act, 1961.
  • Return: The returns earned on tax-free bonds depend on the purchase price and the coupon rate.
  • Low Trading Volume: They are issued in limited. Therefore, their trading volume is low owing to a limited number of buyers and sellers.
  • Interest Rate: Usually, the interest rate of tax-free bonds varies between 5.50% and 6.50%. This is quite enticing for investors, especially considering that the interest income is tax-free. Bondholders receive this interest on a yearly basis. That said, keep in mind that the amount fluctuates based on the current rate of government securities.

Nevertheless, before parting with their funds, investors must note that the tenure of tax-free bonds ranges from 10 to 20 years. Accordingly, they cannot withdraw the amount before the date of maturity. Even though these financial instruments trade on the stock exchange, they are not that liquid.

Tax-free bonds can be an option worth considering for investors who are looking to fulfil their financial objectives. By allocating their savings via KredX’s online platform, they can keep their tax liability at bay. That said, they must consider certain aspects, for example, the applicable tax rate and their tax liability, before parting with their savings.

FAQs on Corporate Bonds:

A. Tax-free bonds are issued by government undertakings to raise funds required for a project. Some examples of these financial instruments include bonds issued by IRFC, HUDCO, NTPC, PFC, and the National Highways Authority of India.