GOVERMENT TAX FREE BONDS

---

The Indian government backed companies issue these tax-free bonds with a reasonable interest rate. These bonds are of long-term maturity, and the proceeds are usually invested in infrastructure projects. The income that you earn in tax-free bonds in the form of interests is fully exempted from incometax 

Features & benefits of tax-free bonds

​

Tax-exemption

The income you earn in the form of interest is entirely free from income tax. There is no tax deducted at source (TDS) either. This doesn’t mean that you can claim the investment amount for the tax deduction. Hence, you must always declare the interest as income. However, compared to the bank FDs, tax-free bonds offer great benefits to investors who are in the high tax bracket.

​

Interest

These bonds currently offer 6.5% rate, which is fairly attractive you consider the tax-exemption. The bondholder receives the interest annually. The rates are subject to fluctuations as they are related to the current rate of the government securities.

Risk factors

Chances of defaulting on interest payment is very low as these schemes are from the government itself. It also offers capital protection and a fixed annual income. Hence, it is quite safe.

Liquidity

You cannot liquidate tax-free bonds as easily as, say, debt funds. This is because these government bonds are long-term investments and have longer lock-in periods. So, do not treat this as an emergency fund.

Lock-in tenure

Tax free bonds have higher lock-in-period that range from 10 to 20 years. You cannot withdraw your money before the maturity date. Therefore, please make sure that you will not need this money in near future before investing.

​​

Issuance & transaction

They issue tax-free bonds using a demat account or in physical mode, and trade in stock markets. Hence, the interest you earn on these bonds is tax-free. However, the capital gain from selling these bonds in stock markets is taxable.

Returns

The returns you make on these bonds are largely dependent on the buying price. This is because they are traded in low volumes with a limited number of interested buyers or sellers.