How to invest in tax-free bonds?

Written on Wednesday, February 7, 2018
By Mitali Sharma

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If you are looking for any fixed income product, then one of the good options for you is Tax-free bond because not just it offers you returns at a fixed interest rate but also provides tax benefits. When it comes to fixed income product, usually Bank FD is the preferred choice for many. But the tax-free bond has an edge over Bank FD because if the interest earned on Bank FD exceeds Rs.10,000 then it attracts TDS @ 10%, while no TDS or other sort of tax-deduction gets applied to tax-free bond. Only 5 years Bank FD are tax-friendly, as it saves you tax on investmen under section 80 C, but again returns are not tax-free.


A tax-free bond is a security issued by Government-backed entities, financial institutions and Public undertakings, such as IRFC, PFC, NHAI, HUDCO, REC, NTPC, NHPC, IREDA, etc. It is issued for a fixed tenure and carries a coupon rate of interest. The interest rate of a tax-free bond primarily depends on the rating of the issuer and the type of investor-- retail or high net worth.


The process of investment


Whenever the Govt. or the companies introduce a public issue or IPO (Initial Public Offering) of a Tax-free bond, they sell it through primary market. You can easily buy the bonds in physical or demat format by applying online as well as offline for it. When there are new issues available, you can find the announcement/advertisement of the same in the websites of financial solution providers like Bajaj Capital. For investing purpose also, you can approach us and we can smoothly facilitate your investment process.  However, tax-free bonds are allotted on the basis of "First come First Serve."


Once the public issue is over, then also you can invest in these bonds via secondary market, i.e from Exchange. Post the public issue, these bonds get listed on BSE or NSE or both. So, you can easily invest in these bonds using your trading account, just the way you invest in shares. 


Prime Benefits


1) An attractive choice for you if you want tax-free and secured returns
2) You can easily sell a tax-free bond any time before maturity.
3) There is flexibility to hold it in demat and physical format
4) You can choose investment tenure for up to 10, 15, or 20 years 
For those who fall under high tax bracket, these bonds are an attractive option. Interest earned on bank FD over Rs. 10,000 is fully taxable and thus it gets added to one's total income. But as the returns from tax-free bonds don't attract any tax so it helps one in keeping one's tax liability at bay.  

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