Tax Free Bonds
Tax free bonds are highly popular investment option among investors due to the taxation benefit that they offer. The Interest is exempt from taxation under the Income Tax Act, 1961. Some Tax free bonds are IIFCL, IRFC, PFC, NHAI, HUDCO, REC, NTPC, NHPC, Indian Renewable Energy Development Agency, Airports Authority of India and Cochin Shipyard etc.
Features
Tenure: Choice of 10 years, 15years & 20 years
Liquidity: Such bonds are listed and Traded on NSE / BSE, liquidity is available, No lock-in period
Form-Could be held either in Demat or Physical form.
Risk: Issued by government-owned companies. So they are unlikely to default
Tax Advantage
Interest received is tax-free, thus after-tax returns work out to be higher for the tax-exempt bond assuming a tax-free coupon yield of 8.2%, the implied pre-tax rate will be to the tune of 11.79% for investors in the 30% tax bracket (those earning more than Rs 10 lakh a year). Short term capital gains from such a sale will be taxed as normal income, within 12 months Long-term capital gains will be taxed at 10%. If the The bonds are held for at least 12 months or more The long-term capital gains from these bonds are not eligible for indexation benefit which could have cut tax.
Who Can Invest?
- Retail Individual Investors (RIIs),
- High Net worth Individuals (HNIs)
- Corporates/Trusts
- Qualified Institutional Buyers (QIBs)
Advantages
- Tax-Free Income
- Low risk
- Listing on exchanges so easily Tradable provides liquidity
- Holding bonds in ‘Demat Form’ makes your investments easy to handle & monitor