List of Tax-Free Bonds in India 2024 (2024)

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How to invest in tax-free bonds?
With growing digitisation, investing has become hassle-free. Government securities can also be subscribed online and offline, like any other investment option.
For example, if the government offers the issue for a limited time, ideally, you should subscribe to it through your demat account. If you want to subscribe to the issue physically, you must fill out and submit the subscription form within the timeframe. You must also submit documents such as your PAN and bank details such as the account number and IFSC.

How to redeem tax-free bonds?
Tax-free bonds can only be redeemed at maturity. The issuing body, i.e. the government or government-backed organisations, will not buy back the bond at any point. But, as mentioned earlier, you can sell these bonds in the secondary market. Any short-term and long-term capital gain earned from the sale will be taxable.
The government of India hasn’t issued any new tax-free bonds since 2016. Whenever you invest, ensure that you know the prevailing term and interest rates if you consider the ones issued by PSU-backed companies.

• Tax exemption
  The interest earned through these government-backed securities is entirely exempt from income tax.
• Risk
  Apart from providing fixed income to investors, tax-free bonds are government-backed securities and are considered one of the safest investment options.
• Liquidity and Tenure
  Tax-free bonds have a longer maturity period of 10-20 years. However, these tax-free bonds can be traded in the secondary market. But there are limited buyers and sellers in the secondary market. As a result, the liquidity in these bonds ranges from moderate to high.
• Fixed Interest
  Tax-free bonds usually have a pre-fixed coupon rate by the government. The interest rate generally ranges from 5.50% to 6.50%.

• Tax-exempt income: The interest earned from tax-free bonds is exempt from income tax.
• Stable income: Tax-free bonds provide fixed interest rates throughout the tenure. This can be particularly useful for elderly individuals who seek regular income without any volatility.
• Capital preservation: Tax-free bonds are considered safe investments since government-backed entities that issue these bonds have a strong financial track record. This makes them relatively less risky than other investment instruments.

• It is important to note that any capital appreciation earned through these bonds is not tax-free.
• Tax-free bonds are susceptible to inflation and reinvestment risk.
• If you invest in tax-free bonds, say for 10 years, you cannot redeem the bond before it matures. However, you can trade them in the secondary market. This makes tax-free bonds moderately liquid.

Let's consider the following details for the example:
Purchase Price: ₹10,000
Coupon Rate: 7%
Face Value: ₹10,000
Holding Period: 5 years
Here's how you can calculate the yield:

To calculate the yield, divide the Annual Interest by the Purchase Price, and multiply by 100 to express it as a percentage:
Yield (%) = (Annual Interest (₹) / Purchase Price (₹)) * 100
= (₹700 / ₹10,000) * 100 = 7%
So, the yield is 7%.

Individuals in high tax bracket rates and looking for long-term fixed-income investments with tax exemptions can invest in tax-free bonds. The following are the different investor categories that are allowed to invest in tax-free bonds:

• Retail investors, including non-resident Indians (NRI) and Hindu Undivided Family (HUF)
• High net worth individuals (HNIs) with a low-risk tolerance and the ability to invest up to Rs. 10 lakhs
• Corporates, regional rural banks, cooperative banks, trusts, partnership firms, limited liability partnerships, and other legally authorised entities
• Qualified institutional buyers (QIBs) defined by the Securities and Exchange Board of India (SEBI) Guidelines, 2000

For tax-free bonds, the interest earned on the bonds is non-taxable. But for a tax savings bond, you get benefits on the investment amount, and the interest is taxable.

PFC, IRFC, NHAI, REC, Hudco and Nabard have commonly known bonds among investors.

The government of India hasn’t issued any new tax-free bonds since 2016. Thus, you should be aware of the prevailing term and interest rate if you consider the ones issued by PSU-backed companies.. Remember to check the YTM of the bond and the maturity date before investing.