5 Safe Tax Free Bonds For 2020

After IL&FS default and rating downgrades of other fixed income instrument hit investors hard, they are now flocking to other safe avenues that have the government of India backing and at the same time are tax efficient yielding better returns.

One such avenue is tax-free bonds and given the current scenario, personal finance experts recommend considering short term tax free bonds that offer moderate liquidity as they are listed on Indian bourses. Investors can also buy them from the secondary market.

Also, as interest on bank fixed deposits have been trending lower, for higher tax bracket taxpayers, the yield on maturity or return on investment on tax-free bonds could be 5.65-5.72% as against FD yielding post tax return of 4.25-4.5% for 30% tax slab category.

Tax-free bonds: Who should invest?

This debt investment is best suited for risk averse, conservative category or retirees who are seeking regular income source and fall within highest tax slab of 30%. Interest earned on tax-free bonds is tax free in the hands of the investor i.e. there arises no tax implication on the interest made on these bonds. Further, investors earn interest on an annual basis which is credited to the bondholders account.

Though, capital gains if any on sale of bonds are taxed depending upon the holding period. If holding period is less than 1 year, then gains are added to the total income and taxed as per the individual's slab rate. And if they are held for one year then long term capital gains tax @ 10% without indexation benefit will be levied.

Points to note when investing in Tax-free bonds

1. Credit rating of the instrument
2. Coupon rate
3. Yield to maturity
4. Liquidity
5. Maturity date

So, here are listed best 5 tax-free bonds for you consider for safe returns:

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