What is Tax Free Bonds: Tax free bonds have better paper quality and rating. In these schemes, the interest received on maturity is tax free. The principal amount is payable on maturity. This is a better option for those tax payers who fall in higher tax bracket.
Invest in tax free bonds: The attraction of tax free bonds is increasing for safe returns. These bonds are issued by the government for a specific purpose, and they offer interest equal to or slightly higher than FD. The specialty of these schemes is that there is sovereign guarantee of the government on it, while the interest is also tax free. However, it should be noted that tax free bonds and tax saver bonds are two different types of options.
What are tax free bonds?
Tax free bonds are a type of debt investment option. Government entities issue fixed income securities. These are known as tax-free bonds. These options provide investors with an opportunity to earn annual pre-fixed interest income, as well as a safe investment option. The interest earned in this is tax-free. Like other bonds, the principal amount is payable on maturity. The maturity period for tax-free bonds is usually between 10 and 20 years, and their interest rates are usually lower than other fixed income options. It is a better option for those taxpayers who fall in higher tax brackets. Tax free bonds are available on the exchange. This option is better for investors looking for safe returns in the long term.
These companies issue bonds
These include companies like NTPC, NHPC, India Infrastructure Finance Company Limited (IIFCL), National Highway Authority of India (NHAI), Housing and Urban Development Corporation Limited (HUDCO), Indian Railway Finance Corporation Limited (IRFC), Power Finance Corporation Limited (PFC), REC, NABARD.
Issuing entity, coupon rate and yield
National Highways Authority of India: 8.75%, 5.48%
National Housing Bank: 9.1%, 5.01%
NTPC Limited: 8.91%, 5.6%
REC: 8.71%, 5.49%
Housing and Urban Development Corporation: 7.64%, 5.7%
Indian Railways Corporation: 8.63%, 5.11%
Power Finance Corporation: 8.67%, 5.20
Why are these bonds issued
When companies need money to expand their business, they issue such bonds at a fixed coupon rate. There is a guarantee of returns on these. These bonds are listed in the stock market and the returns received from them are not taxed. The purpose of issuing tax-free bonds by companies is to raise funds for a specific reason for a fixed time period.
Benefits of Tax Free Bonds
They provide stable but safe returns. The lock-in in tax free bonds starts from 5 years, while the maturity of most bonds is 10 years or 15 years or 20 years. The biggest advantage of tax free bonds is that their paper quality and rating is better than other bonds. These bonds are issued by the government for a specific purpose, so they have the sovereign guarantee of the government.
Different from tax-saving bonds
That is, no tax is to be paid on the income earned from investing in them. This is not the case with tax saving bonds. In the case of tax saving bonds, tax benefit is available under Section 80CCF of the Income Tax Act on the amount invested in these schemes in a financial year. Under this, the investor gets the benefit of tax exemption on investment up to Rs 20,000. The interest income from this is not tax-free. The interest income from tax-free bonds is completely tax-free as per Section 10 of the Income Tax Act 1961.
