Tax free bonds give you interest that is tax free. So, whereas income from most other fixed yielding instruments is added to your total income to compute tax, here you get an exemption.
Until a few years ago, there were various tax free bonds that were issued. However, now you have to buy them either from the BSE or the NSE. Here are 5 tax free bonds that you might consider:
HUDCO N3 series
The HUDCO N3 series offers you an interest rate of 8.1 per cent. However, your yields would depend on the rate at which you buy the bonds. The Bonds are rated as AA, but, one need not worry too much on the rating, given that HUDCO is a government owned entity.
Interest rates on these bonds are payable in the month of March every year. At the moment these bonds are traded around the Rs 1,180 mark. However, you should buy them at a lower rate, so as to ensure that you get maximum yields.
The bonds expire in the month of March 2022.
REC N9 series tax free bonds
REC is a government of Indian owned enterprise. The bonds offer you a coupon rate of 8.71 per cent. However, the bonds are listed at around Rs 1,200, which means the yields drop, as the original price was Rs 1,000 per bond.
The interest is payable in the month of September every year and the Bonds have a fair amount of liquidity. These tax free bonds are also safe, given that they are backed by the government of Indian owned entity. Remember, it is most important to buy them from the BSE or the NSE at a lower price for yields to be attractive.
HUDCO N2 Series tax free bonds
HUDO N2 series offers an interest rate of 8.2 per cent. Interest rate is payable in the month of March each year and the bonds mature in 2027. However, you do not have to worry about the maturity as they can be sold on the BSE of the NSE even before the maturity. An important fact to remember is that bonds are not very liquid and hence if you want to sell large quantities you maybe stuck.
Again, like REC this is a government of Indian owned enterprise and hence the bonds are safe. Interest earned every year is completely exempt from tax.
Indian Railways Finance Corporation N2 series
The Bonds here offer an interest rate of 8.1 per cent, with the interest being paid in the month of Feb every year. The price at at the moment for this instrument is around Rs 1,162 .
They are also rates as AAA and hence are very safe. Either way, they are safe, given that the entity is a government of Indian owned entity. The bonds expire in 2017, and one can sell them on the exchanges, where liquidity at times may not be very great.
IRFC N1 series
Indian Railways Finance Corporation (IRFC) N1 series offers a slightly lower interest rate of 8 per cent. The bonds are quoted at Rs 1,119 and expire in 2027. More or less the features are like the previous tax free bond series. All of the above bonds are best for those looking at tax free income, but, returns would depend on the rate at which you buy these bonds.