What is Tax Free Bonds ? Get to know A - Z about Tax Free Bonds

Tax Free Bonds

Tax free bonds are very popular these days. Anyone who wants to do safe investment, must look for Tax free bonds as an option for investing from long term purpose. These bonds are issued by several Government Companies in which the interest which you earn is not taxable.

Tax Free Bonds - India

Imagine a situation where a Fixed Deposit or Tax Saver Deposit or Tax Free Bonds are there and you want to invest in only one. Which one to go for ?

According to me if you have a corpus which you won't be requiring in short term goals or in an emergency, a certain amount of amount should be invested in Tax Free Bonds.

Watch this video to understand more.

Salient Features of Tax Free Bonds

 

1. All the interest earned is tax free.


2. You get interest every year as compared to other investments where you get interest at the end of tenure of investment.


3. Can be sold in bond market at a price higher from which you have bought it.


4. Chances of default are almost none in Tax Free Bonds.

 

Key information of Tax Free Bonds

 

1. Government Organizations for Eg. National Highway Authority of India (NHAI) release issue of Tax Free Bonds. One is required to buy the bonds in units before the deadline date.


2.  Each bond unit generally is of Rs. 1000. So for Eg. if one wants to invest Rs. 30,000 in NHAI Tax free Bonds, then 30 units are required to be bought.


3. The issue of bond happens after the deadline date based on subscription ratio. If for Eg. if the bond is oversubscribed twice then for Rs. 30,000 of bonds you would get only Rs 15,000 worth of bonds and balance money would be credited to your Bank A/C.


4. These bonds generally are of long duration such as 10/15/20 years so lock-in period is big, but one can sell to another investor anytime if they want, but it would be sold only if any investor is ready to buy at the price in which you want to sell the bond units which you have purchased.

 

Who should invest in Tax Free Bonds and how much ?

 

1. According to me, I think if you have savings which you want to keep in a place where your principal is safe and you also get stable returns in terms of interest every year.


2. The coupon rate (i.e interest rate) is generally little bit less than that of fixed deposit interest rate.  For Eg. In March 2016, Nabard had come out with tax free bonds with rate of interest of 7.64% and tenure of 15 years [Source]. At that time majority of Banks were giving FD Interest rates of 8.0%-8.2% range. As FD incurs Tax Deducted at Source (TDS), the investor in 30% tax bracket earns only 5.6%-5.74% interest rate which is way less than what one could get from Tax Free Bonds.


3. In terms of amount, it highly depends on your income and your savings available. I would suggest that for person saving 5-10L a year should invest around 10% of their amount in these bonds. Many film stars are reportedly doing this for invading tax for years now. [Source]