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All About Tax Free Bonds In India 2018

By Kavinkal Satyanarayan

Tax free bonds are long term fixed interest securities. Tax free Bonds are issued by the Government or Government sanctioned entities to finance socially beneficial projects like Highways, Electrification etc.


All About Tax Free Bonds In India 2018
Since investors are contributing to nation building efforts, the government offers the incentive of returns on interest from such investments being exempt from income tax. For investors this implies higher post tax returns, since interest rates depend on the income tax bracket you are in.

Securities, in general are categorised based on returns and the risk involved in seeking such returns. This also calls for certain awareness and effort in managing such risks which also varies amongst various Asset classes. Understanding Security classes is important before making investments that suit your temperament and affordability.

For instance, gold and real estate are considered safe assets that will preserve value or even be profitable over time. But equally the initial acquisition of these are less investment than purchase of consumer products.

Because these will be seldom profitably leveraged, and if at all only to tide over committed liabilities like marriage expenses. Fixed Deposits are a safe bet.

But there is little certainty that the returns will beat inflation, unless it is locked up over duration over ten years. In which case the benefit of compounding will fetch extra ordinary returns but at the cost of liquidity in the intervening period.

Stocks and shares are a tempting proposition in the prevailing market conditions. But share investment requires some knowledge of how they work, as also considerable effort in tracking valuations.

Also given the volatility in the market one needs more than a sober temperament to be profitable in the stock market. A possible alternate of the same class is Mutual funds.

Here the effort passes to professionals, but at a price but the risk continues to be there. there are other asset classes like derivatives. But these require a high degree of commitment and are best left to professionals. Bonds are an asset class that roughly sit between Fixed deposit and Shares. But then each asset class is different in its own way and investing on one or the other depends on your current situation and your inclination and aptitude to manage the investment.


Of late tax-free bonds have become increasingly attractive investment instruments given the government's impetus for infrastructure Projects.

These bonds have the benefit of being safe investments giving reasonable returns, are fairly liquid and easy to manage. Being government issues the default risk is very low and interest payments are regular.

The Government priority for infrastructure and the massive amount of funds required perforce compels the government to offer good returns to be competitive in the market. So far as liquidity is concerned, there exists a reasonably vibrant secondary Bond market. Bonds may sell at premium or discount. If the bond is going at a discount the cost of the sale should be weighed against the benefit of liquidity at that point of time. Managing bonds is comparatively easy.

Benefits of tax free bonds

The returns are certain and predictable. Tax free bonds are listed on the National Stock Exchange and the Bombay Stock Exchange, which means that they are very liquid. Thus tax-free bonds afford the safety of fixed deposits and yet provide the flexibility to trade like stocks and shares.

Bonds are judged primarily by their coupon rates. The tenure is a consideration based on the investment horizon. The yield to maturity of a bond is the overall return computed based on last traded price of the bond.

When bonds sell at a premium the yield to maturity tends to decrease and vice versa. This is because the returns are fixed and a larger or smaller number in the denominator inversely effects the yield to maturity. As such yield to maturity is a secondary market criterion and neither effects the annual returns nor the maturity amount.

Tax free bonds: Interest fully exempt from tax

A word of caution. Tax free bonds are not to be confused with Capital gains bonds also called Infrastructure bonds. Tax free bonds are covered under the provisions of Sec 10(15)(IV)(h) of IT Act 1961. The income due to interest accrual from these are exempt from income tax in full and are not treated as part of total income in IT returns.

However, if you buy and sell a tax free bond at a profit, you are liable to pay a capital gains tax on the same.

Various listed tax free bonds for 2018

While there has been no fresh issue of tax free bonds in 2017 and 2018. You can buy a few of them from the NSE and BSE.

Tax free bonds can be sold through the exchanges

National Highways Authority of India, Rural Electrification Corporation Limited, HUDCO, IRFC are some of the entities sanctioned by the Government to issue tax free bonds in India.

There are many Tax-free bonds active both at the NSE as also BSE. About a hundred are active in the NSE and even more in the BSE. Daily trading volumes go up to 20,000 units or more. Most of these are going at a premium especially since interest rates have fallen in the last one year.

Most have face values of the order of Rs 1000. Tax free bonds have a maturity period of 10, 15 or 20 years. However, as mentioned earlier, if you wish to sell the same, you can do so, through the exchanges.

Tax free bonds to buy in 2018

1) NHAI Tax Free Bond 2018

NHAI has no less than ten bond issues active in the market. Coupon rates typically vary from 7.14% to 8.3%. The tenures are of the order of five or ten or fifteen years. Some are due to mature in January 2022 while others as late as 2031. All have face value of Rs 1,000.

All are trading at premium ranging from 10% to 20%. NHAI bonds are active in the secondary market and are readily available. Further bond issues are expected though not yet announced.

2) HUDCO Tax Free Bonds

HUDCO is very active in the bond market. They have no less than thirty bond issues outstanding with about fifteen of these actively traded in the secondary market. Since 2011-12 they have been raising Rs 2000 to Rs 5000 crores in the bond market each year. Coupon rates vary from 7.03% to 9.01%.

Their face value is of Rs 1,000. Tenures are of the order of 5, 10 or 15 years and some are due to mature in 2022 and others as late as 2034. All the active issues command premium ranging from 0.05% to 29%. HUDCO is regular in the bond market and announcement of new issues are expected.

3) NTPC Tax Free Bonds

NTPC raised over Rs 8000 crores in 2016-17 from the bond market. They have up to 65 Bond issues currently outstanding. NTPC is reasonably active in the market with eight active bonds in the secondary market. Coupon rates vary from 7.11% to 8.91%. Tenures of bonds are generally 10 or 15 years.

Their bonds are maturing from 2018 up to 2035. These again are trading at premium ranging for 0.08% to 24%. NTPC bonds are also readily available in the secondary market.

4) Indian Railways Finance Corporation tax Free Bonds

NSE lists twenty active IRFC bonds on their portal. Coupon rates vary from 7.04% to 8.65%. All have face value of Rs 1,000. Most are trading at premium ranging from 0.07% to 22%. Tenure is 10 or 15 years with bonds maturing as early as 2022 and as late as 2035.bonds are active in the secondary market and readily available.

5) Rural Electrification Corporation Tax Free bonds

REC raises Rs 1000 to Rs 2000 crores each year by means of tax free bonds. They started this in 2011-2012 and have since raised Rs 12,000 Crores in tax free bonds. They offer good coupon rates of 7% to 8.6%. Most bonds have face value of Rs 1000 with a few having Rs 1,00,000 face value. The bonds are not so active in the secondary market even though the command premium comparable to bonds issued by other agencies. Tenures are 10 or 15 years and bonds are likely to mature as late as 2034.

6) Power Finance Corporation

PFC was actively issuing tax free bonds from 2010 to 2013 but have since not been making fresh issues. They had been offering attractive coupon rates of about 9%. Bonds have face value of Rs 1000 and are trading at a premium of up to 30%. But most of the bonds are inactive in the secondary market.

7) National Housing Bank

The NHB is an RBI subsidiary which promotes financial institutions in the Housing sector. Raised in 1988 it had an earlier tranche of tax free bond issue. In its second tranche issued in December 2013, it sought to raise 250 Crores with rights to retain oversubscription of up to 1000 Crores.

The issue was oversubscribed, and the bond is doing well in the market. The bond was issued in three series each with tenor of 5, 10 and 15 years respectively. The corresponding coupon rate are 8.51%, 8.88% and 9.01% respectively. The face value is Rs 5000. The bonds are trading at a premium of about 30%. The bonds will be active till 2034.

In addition to these there are other companies with successful tax-free bond issues in the market. These include India Infrastructure Finance limited, Indian Renewable Energy Development Agency, Jawahar Lal Nehru Port Trust Limited, National Bank for Agriculture and Rural Development Limited etc. India Infrastructure Finance Limited has four tax-free bond series active in the market. All these issues have features, like coupon rate and tenor, comparable to other tax-free bonds in the market. Most of these are also active in the secondary market and are readily available. Most command premium over 10%.

Tax free bonds as an asset class are beneficial when seeking safe investment along with ready liquidity over a long investment horizon. Bond are generally large ticket size investments. Most of the recent issues have been oversubscribed and are selling at a premium.

Clearly, tax-free bonds are becoming an attractive option for long term investors who have little appetite for risk. Falling interest rates with moderate inflation prospects and a volatile market puts bonds into a comfort zone for investors. Also, the tax-free dimension make investment in bonds attractive in percentage terms.

Tax free bonds: Good support from the government

The tax-free bond market has been supportive of Government entities seeking funds to develop national infrastructure. Most of the issues are oversubscribed and the bonds command reasonable premium in the market.

Market sentiment, both Institutional and retail investors have been favorable to bond issues and this sentiment is likely to prevail for some time to come. The market sentiment favoring bonds issues, the Government is likely to come to come up with more and more of these specially to fund Infrastructure.

This, not only to exploit the prevailing sentiment but also to preserve the glide path of Fiscal deficit which the Government is committed to reduce as a policy priority. The secondary market is also quite vibrant and active. Trading volumes are reasonably high, and the premiums are increasing over time. Tax-free bond market in India is therefore set to grow, keeping pace with the economic progress of the country.

Read more about: tax free bonds nhai rec
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