India is one of those countries where the tax levels are not necessarily the highest. The finance laws of the land are such that a higher percentage of the total income is subject to taxes in case of people with higher income.
In layman’s terms, a tax free bond is where the interest that you receive from investing in the bond is exempted from income tax. Now the million dollar question is whether the same is feasible in the long run. This article explores the pros and cons of tax free bonds in India.
Advantages of tax free bonds
• Low risk bond
Most of these are government debt securities and hence the risk that is involved in the same is bare minimum. Hence, chances of you losing out on your money are very bleak. Tax saving bonds is not subject to any form of market risks. Thus if you are looking for stability and are not greedy for very high gains, going for this type of bond will prove to be highly beneficial for you.
• No tax worries
One major disadvantage of any investment is the fact that a major chunk of what you earn on the interest goes out in paying of taxes. In this case you do not really have to worry about that as your interest amount is also tax free here. The idea of putting a portion of your income for the betterment of your future instead of just paying away the same in the form of tax to the central government does seem to be a viable option. In fact this is the main reason why most people invest in this type of bonds.
Disadvantages of tax free bonds in India
• Lower interest rates
A major disadvantage of the tax free bonds is the fact that the interest rates here are much lower as compared to other types of long term securities. This is a very important parameter and people often tend to neglect the same because of the tax saving concerns at the other end. However a careful line should be drawn between the tax saving and that of the interest involved in order to optimize your returns.
•Lack of liquidity
The tax free bonds issued by the government are long-term in nature. So, they are issued for a period of 10, 20 and 25 years. If you need to sell them, you can. However, these have to be sold through the recognized stock exchanges in the country.
The problem is that they may not be necessarily liquid and hence you cannot sell large quantity of bonds.
However, if you own 5 to 10 bonds, it is not easy to sell. All of the bonds are issued by government owned companies like IRFC, HUCO, REC etc. Hence, they are safe, though they may not be very liquid.