Those looking to save tax are constantly looking at investing in instruments where there is no tax liability. There are very few instruments in India where the interest income is exempt from tax in India. One of them is the PPF and the second is the Tax Free bonds. Most of the other interest yielding instruments like bank deposits, company fixed deposits, NSC, Post Office MIS, attract tax on interest income. Therefore, if you are in the highest tax bracket, it makes sense to invest in tax free bonds in India.
Over the last few years government owned institutions like National Highways Authority of India, Indian Railways Finance Corporation, Rural Electrification Corporation of India, Housing and Urban Development Corporation etc, have come up with tax free bonds.
When the issues opened these institutions offered a coupon rate of between 7-9.05 per cent and the interest income was tax free. For those who missed these tax free opportunities, you can still buy the same from the markets.
Here's how you can buy the tax free bonds?
All of these bonds are listed either on the Bombay Stock Exchange or the National Stock Exchange. You can buy them in a similar way as you buy shares. For example, if you are buying online yourself, you can buy Hudco Tax free bonds, by simply typing HUDCO and the dropdown box would show the various tax free bonds from HUDCO.
Alternatively, you can ask your broker to buy the same for you.
You can also check rates on the NSE website. For example, you can see the HUDCO rates here
You can also type on the securities information to get details of the year of maturity, interest rate and most importantly interest payment date.
There are a few things that you must remember though. One is that tax free bonds do not have very high liquidity. This means that you may not be able to buy in very large quantities. On the other hand be careful at what price you buy. If the price is high the yields on your bonds would fall.