Tax Free Bonds – Purpose, Benefits, Interest, Eligibility, Risk

Tax free bonds are highly popular investment option among investors due to the taxation benefit that they offer. Know more about Tax Free Bonds in India. 1.How to Invest in Tax Free


Tax Free Bonds

Tax free bonds are highly popular investment option among investors due to the taxation benefit that they offer. Know more about Tax Free Bonds in India. 1.How to Invest in Tax Free Bonds? 2. Who can Invest? 3. Comparison with Tax Saving Bonds. These bonds, generally issued by Government backed entities, are exempt from taxation on the interest income received from such instruments under the Income Tax Act, 1961.

The income by way of interest on these Bonds is fully exempt from Income Tax and shall not form part of Total Income as per provisions under section 10 (15) (iv) (h) of I.T. Act, 1961. These bonds are generally issued by Government Backed entities and thus have very low default risk.

Purpose of Tax Free Bonds:

Tax Free Bonds have emerged as one of the most popular investment options among the common investors. These are the bonds which are  issued by government enterprises mostly and fetch a fixed  rate of return to the investors. Mostly these are used to finance the projects having a long gestation period. As the proceeds from the bonds are invested in infrastructure projects, certainly they have a long-term maturity of 10, 15 or 20 years.

Must Read – Best Long Term Investment Plans In India

Benefits of Tax Free-Bonds:

Tax free bonds fetch you the return in the form of 2 ways. One is by way of giving certain % of return on bond and the another benefit is tax saving. Interest earned on this bonds does not attract tax. Even Tax is not required to be deducted on the interest amount credited to the investors account by the issuer. As this it self is a major benefit to the investors, amount invested in bonds will not be qualified for deduction.

Tax Free Bonds Interest Rate:

Interest paid on these bonds is directly linked to the rate of return given by various government securities in the market. Interest in directly credited to the bank accounts of the investor. When the performance of the government securities is well there may be a chance of getting very good returns from these bonds.

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Liquidity of Tax Free Bonds:

These bonds score less in terms of liquidity. As the funds invested in these bonds are mainly for the long term purposes they carry longer maturity period. Hence the funds are blocked for years together unless like fixed deposits which give you various flexible maturity periods.

Risk :

Since these are mainly programmed to give financial support to the government backed enterprises, they are very secured in nature. So the investors do not need to worry about the risk of loss.

Secondary Market:

These are traded in secondary market. So it gives the advantage of capital appreciation over a long term. Depending upon the performance of the enterprises by whom these are issued the value of the bonds in the open market have chances of getting high worth.

Tax Free Bonds 2015

In 2015, the government of India has permitted seven state owned companies to sell tax free bonds in India for the financial year 2015 for the purpose of raising an amount of Rs.40, 000. Listed below are the top seven tax free bonds offered by different companies in 2015:

State Owned CompaniesAllocated Amount of Bonds
National Highway Authority of IndiaRs. 24,000
Indian Railways Finance CorporationRs. 6,000
Housing and Urban Development CorporationRs. 5,000.
Indian Renewable Energy Development AgencyRs. 2,000.
Power Finance CorporationRs.1,000
Rural Electrification LimitedRs. 1,000
NTPC Limited1,000

Eligibility Criteria

Following persons are eligible to invest in these bonds;

  • Retail Individual Investors
  • High Net worth Individuals
  • Companies, LLPs, Firms, Trusts, Cooperative banks, rural banks and other legal entities.
  • Qualified Institutional buyers.
  • HUFs and NRIs.

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These bonds are suitable for those who want to earn a fixed periodical income without having ant risk.

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