Tax Free Bonds stand out as a compelling option for those seeking a safe, long-term investment with the added benefit of tax-exempt interest income. These bonds, issued by government-backed entities, offer a unique blend of security and tax efficiency, making them an attractive choice for a wide range of investors. Let’s delve into the features, benefits, and processes associated with Tax Free Bonds.

Key Features of Tax Free Bonds

1. Long Tenor – Tax Free Bonds are designed for long-term investment horizons, typically with tenures of 10, 15, or 20 years. This extended period provides stability and ensures a steady stream of income over the years.

2. Tax-Free Interest Income – One of the most appealing aspects of Tax Free Bonds is that the interest earned on these bonds is exempt from tax under Section 10 (15)(iv)(h) of the Income Tax Act. This tax exemption significantly enhances the effective returns for investors, especially those in higher tax brackets.

3. Government-Backed Security – The entities issuing these bonds are generally government enterprises, which means they carry a very low risk of default. This government backing provides an added layer of security, making these bonds a reliable investment option.

4. Eligibility Criteria – Tax Free Bonds are accessible to a broad spectrum of investors, including –

• Retail Individual Investors (RIIs), including Hindu Undivided Families (HUFs) and Non-Resident Indians (NRIs)
• Qualified Institutional Buyers (QIBs)
• Corporates
• High Net Worth Individuals (HNIs)

Investors can find detailed eligibility criteria in the offer documents available on platforms like Dezerv.

5. Lower Coupon Rates with Higher Effective Returns – While the nominal interest rates on Tax Free Bonds might be slightly lower compared to other bonds, the tax-exempt status of the interest income results in higher effective returns. This is particularly beneficial for investors in higher tax brackets, such as those paying 20-30% in taxes.

Who Issues Tax Free Bonds?

Tax Free Bonds are issued by government-backed entities to fund projects that contribute to national development. Common issuers include –

• National Highway Authority of India (NHAI)
• Power Finance Corporation Limited (PFC)
• Indian Infrastructure Finance Company Limited (IIFCL)
• Housing and Urban Development Corporation Limited (HUDCO)
• Indian Renewable Energy Development Agency Limited (IREDA)
• Rural Electrification Corporation Limited (REC)
• National Housing Bank (NHB)
• NHPC Limited (formerly National Hydroelectric Power Corporation Ltd.)
• NTPC Limited (formerly National Thermal Power Corporation)

Benefits of Investing in Tax Free Bonds

1. Assured and Regular Income – Tax Free Bonds provide a predictable and stable income stream, with interest typically paid out annually. This regular income can be especially valuable for retirees or those seeking a steady cash flow.

2. Safety and Security – Given the government’s stake in the issuing entities, the risk of default is extremely low, making these bonds a safe investment.

3. Liquidity – Despite their long tenures, Tax Free Bonds are listed on stock exchanges, allowing investors to sell them in the secondary market if they need to exit before maturity. However, it’s important to note that any capital gains from selling these bonds will be subject to capital gains tax.

4. Attractive for High Tax Bracket Investors – For investors in higher tax brackets, the tax-free nature of the interest income makes these bonds an efficient tool for tax planning and income generation.

How to Invest in Tax Free Bonds

Investing in Tax Free Bonds can be done in two primary ways –

1. Bond Public Issue – Investors can subscribe to Tax Free Bonds when they are first issued in the market. These issues are typically well-publicized, and investors can apply through their brokers or financial institutions.

2. Secondary Market – Existing Tax Free Bonds can be bought and sold through stock exchanges. This provides flexibility for investors to enter or exit their positions based on market conditions and personal financial needs.

Conclusion

Tax Free Bonds offer a unique combination of safety, regular income, and tax efficiency, making them an ideal investment for risk-averse individuals, especially those in higher tax brackets. By providing a reliable and tax-exempt income stream, these bonds can play a vital role in a diversified investment portfolio. For those looking to invest, platforms like IndiaBonds provide easy access and detailed information on available issues, ensuring a smooth and informed investment process.