Tax Free Bonds have a large tenure, sometimes of 10 years, 15 years and 20 years. No doubt they give you a tax free income and are eagerly sought by those in the higher tax bracket, but selling a tax free bond always remains an issue.
Here is how to sell tax free bonds
Like stocks, these instruments are also traded on the stock exchange. The biggest problem of this instrument is the lack of liquidity.
Say, a bond holder wants to sell 1000 tax free bonds, he may only find a buyer for a few hundred bonds.
Hence, the biggest problem is the lack of liquidity in these instruments. So, if you want to sell 1000 numbers, you may have to sell it over a period of time, say in 2-3 days.
What this also means apart from poor liquidity is that the price discovery may also not be the best. If you want to sell in desperation, you may get a very poor price.
In any case, here are a few ways on how to sell the tax free bond
1) Call your broker and execute the order
Tax Free Bonds trade in the same manner as shares. So, if you do not have an online account you can call your broker and place an order.
You can place a limit order or a market order, as the case maybe.
2) Execute the order online
In case you have a trading and a broking account, you can buy and sell tax free bonds in the secondary market through your online account. Here again, you can place a limit order or a market order as the case maybe.
Things to remember about a tax free bond
1) Tax free bonds are issued by government companies.
This makes these bonds extremely secure. Even if you want to hold them for 10-15 years, they would be safe even with a long term tenure.
2) Interest is tax exempt
The interest on tax free bonds is completely exempt from Income Tax in India. This is one reason why investors do not like to sell tax free bonds in India.
3) Free from defaults
As mentioned earlier, since they are issued by the government they are very safe. You can also check the credit rating of the bonds, which are issued from time to time by the government.
4) Can be held in the physical and demat mode
Tax free bonds, can be held in the demat and the physical form. However, it is important to remember that you cannot sell the bonds in the physical form in the secondary market, through the recognsied stock exchanges in the country.
5) Annual payment of interest
It is important to note that the interest on the bonds is paid yearly, which reduces the yield, as compared to other instruments, where the interest is paid either quarterly or monthly.
The question today is not how to sell tax free bonds in the secondary market, but, when and why to sell.