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 7.3-8.5 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.
You can also type on the securities information to get details of the year of maturity, interest rate and most importantly interest payment date. You can buy these bonds in demat or physical form. You will need to submit PAN if you purchase in physical form.
What are the benefits of investing in tax free bonds in India?
- The bonds are 100% tax free even if the interest from them form a part of you total annual income.
- The returns are good on these investments. Interest rates are high.
- The interest that is paid annually is directly credited into your bank account.
- If you want a steady income for 10 to 20 years, tax free bonds are a good source.
Some points to note before investing in tax- free bonds
- Tax-free bonds do not have very high liquidity as they have a lock-in period of 10 to 20 years. This means that you may not be able to buy in very large quantities.
- Be careful at what price you buy. If the price is high the yields on your bonds would fall.
- Risk of non-payment is low as most bonds are issued by government institutions.
- Interest rates are dependant on ratings from credit agencies.
- Capital gains from selling the tax-free bonds in secondary markets are taxable.