Tax-free bonds attract capital gains tax liability if sold prematurely

Updated: Friday, February 14, 2014, 12:53 [IST]

Tax-free bonds are highly attractive investment bets for those in the higher income tax bracket because of their inherent tax-free nature. The tax-free provision is provided in respect of the interest earned on the interest and only in a case when it is held through the maturity term, the benefit of tax exemption on interest earned through the period can be claimed.Know more about tax-free bonds.

However, due to the longer maturity term of these tax-free bonds of 10, 15 and 20 years, it is quite possible that an investor finds it hard to keep them until the maturity term and might wish to redeem his investment in the instrument after some time. The same is facilitated in the open market as such bonds get listed on the Indian bourses i.e NSE and BSE. However as the volume of trading is relatively low an investor in a practical situation might find really hard to dispose off his investment in the instrument in the secondary market.

In a case when he/she (investor) somehow manages to sell across held tax-free bond units in the open or secondary market there arises tax implication on the income earned during the period.

Tax-implication on tax-free bonds sold prematurely

On the realized capital gains by holding the instrument for a few years, capital gains tax @10% is payable on the gains. (Note: Benefit of cost indexation is not provided in case of tax-free bonds like in real estate).

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