Tax free bonds are the best bet for tax free income in India. With interest rates falling in the economy as a whole, some of these bonds have seen prices rise over and above their original offer price. Nonetheless, they still offer better yields for individuals in the highest tax bracket. Take a look.
Indian Railways Finance Corporation N1 Series
Indian Railways Finance Corporation offers an interest rate of 8 per cent on its tax free bonds. The bonds, which were issued at Rs 1,000 are currently trading at Rs 1063.
The next interest due date on these bonds is Oct 15, 2019.
The yields are the best only for those in the highest tax bracket. Also, we are unable to predict the exact returns that you get, as the same will depend on the prices at which you buy these tax free bonds.
Tax free bonds are thinly traded, hence your returns would largely depend on the price you buy them at. Lower the price, higher the yield and vice versa. Your returns are a direct reflection of the price paid for these listed bonds.
HUDCO N2 Bonds
The HUDCO N2 Bonds are good for those in the highest tax bracket. The bonds are offered at an interest rate of 8.2 per cent and the interest is paid every year on March 5. The coupon rates are much better than the Indian Railways one, though the yields have dropped due to a gain in prices. At the moment, the HUDCO Bonds are trading at Rs 1,163.
Again, if you buy these bonds now, the yields are not too great at the current prices, as the rate per bond is high.
The yield works to around 7.00 per cent, unless you get the bonds at a lower rate.
REC N7 series
The Rural Electrification Corporation had issued the N7series a few years ago. Investors can buy these tax free bonds that are listed on the NSE at a price of Rs 1,243.
The date for payment of interest is September every year. The redemption of the bonds will happen in Sep 2018. The REC Tax Free Bonds are rated AAA and are hence very secure.
The rate of interest on these bonds is 8.46 per cent, which is probably one of the highest in this category. Investors who have invested in other fixed yielding instruments and are paying tax would do well to buy these bonds. This is also a government owned company, which makes the bonds safe.
HUDCO N3 Bonds
The Hudco N3 Bonds are almost similar, though they give a coupon rate of 8.1 per cent only.
The bonds are currently priced at Rs 1,200 and the next interest payment date is March 5, 2019. It is important to note that tax free bonds are thinly traded and you cannot buy and sell in large quantities. Also, the price discovery may not be the best around. So, to that extend you need to discern a little while buying.
Income from the HUDCO N3 Bonds is tax free in the hands of the investors. The post tax yields work to around 7.1 per cent at the current market price.
National Highways Authority Of India
The National Highways Authority of India (NHAI) bonds offer a coupon rate of 8.2 per cent and like all of the companies, they are government owned and hence very secure.
The bonds are priced at Rs 1,080 on the NSE. The coupon rate on these bonds is 8.2 per cent. The next interest payment of these bonds would be Oct 1, 2019. The bonds are AAA rated though there are no worries on defaults, since it is a government owned institution.
It is important to note that as the date of the interest payment date draws closer, these bonds tend to move higher in price.
REC N6 Bonds
The Rural Electrification Corporation (REC) bonds offer a coupon or interest rate in excess of 8 per cent. Actually, the interest rate is 8.46 per cent. This is excellent by any stretch of imagination, especially since the interest earned is tax free.
The next interest payment date is Dec 1, 2019. One of the better bonds in terms of interest and coupon rates, though the price is a little high at Rs 1,102.
These days the government companies are not issuing any tax free bonds. In fact, for the last few years, there has been no tax free bonds. Also, interest rates and returns on them are falling and with prices increasing, they are no longer as lucrative as before.
Do not buy these bonds in large quantities as the liquidity is rather low on these bonds.
Indian Railways N7 Series
The Indian Railways N7 series tax free bonds offers an interest rate of 8.23 per cent. Again, a better coupon rate as compared to most tax free bonds. The bonds are currently priced at Rs 1,140 on the National Stock Exchange. The next interest payment of these bonds is only in April of 2019.
HUDCO N3 Bonds
HUDCO N3 Bond offer you a decent interest rate of 8.1 per cent. However, if you get the bonds at a higher price your yields would fall.
Remember, bonds and yields are inversely related. The bonds offer you an interest in March every year. The bonds are rated AA+, however, being a government owned company there is nothing to worry.
What are Tax free Bonds?
The Indian government backed companies issue these tax-free bonds with a reasonable interest rate.
These bonds are of long-term maturity, and the proceeds are usually invested in infrastructure projects. The income that you earn in tax-free bonds in the form of interests is fully exempted from income tax.
The amount that investor invests in buying the bonds is not eligible for any tax deduction. The interest amount which one gets on tax-free bonds is credited directly to the bond holder's bank account. These tax-free bonds are generally offered by government backed entities.
There is no credit or default risk attached to it. So, if any one is looking for a stable source of income, tax-free bonds are the best investment option for them.
One can also trade using these tax-free bonds as they are listed on the stock exchanges. However, any capital gain from the sale of these bonds in the secondary market is taxable.