Tax free bonds which were issued a few years ago, are the only instruments along with PPF and a few tax saving insurance instruments, whose interest income is exempt from income tax in India. These bonds can be purchased from the stock exchanges and the interest income is tax free. All of these are issued by government backed institutions and are hence very safe to buy. Read How and where to buy tax free bonds after the public issue is complete here
HUDCO N2 series tax free bonds
The HUDCO N2 series tax free bonds come with an interest rate of 8.2 per cent per annum. The interest is paid on March 5, every year and the bonds expire in March 2027. The yields on the bonds would depend on the rate at which you buy the bonds, which are listed in the National Stock Exchange.The bonds are traded around Rs 1093.
Good for those in the highest tax bracket
The HUDCO N3 series tax free bonds carry an interest rate of 8.1 per cent and are due for redemption on March 2022. HUDCO is a government institution and hence the bonds are safe. The yields on the bonds at the current market price of 1075, works out to around 7.5 per cent. The bonds are good for those in the highest tax bracket.
REC N5 series
The Rural Electrification Corporation (REC) N5 series bonds carry an interest rate of 8.01 per cent. The bonds are currently traded at Rs 1001, giving you a yield of 8 per cent.Good for those in the 20 and 30 per cent tax bracket.
AAA rated bonds
The NHAI N1 series has interest payable on Oct 1 each year. The coupon rate on these bonds are 8.2 per cent. The bonds are currently traded at Rs 1,127 and are AAA rated.
REC N6 Series
Issued in Sept 2013 these bonds offer an interest rate of 8.46 per cent. The bonds expires in 2028 and the next interest is payable on Dec 1, 2014. Again, the yields would depend on what price you buy them from the market.