If you have surplus liquidity, are looking to invest in debt instruments and are in a high tax bracket, it is best to look at investments that offer tax free interest income.
There are only a few investments where the interest earned is tax free in the hands of investors. Almost all investments, including most of the post office schemes and bank deposits attract tax on the interest income. So, the interest is added to your total income and the tax is computed accordingly. Here are 3 investments that do not attract tax on the interest income earned.
Public Provident Fund (PPF)
This is the only post office small savings scheme, where the interest earned is completely exempt from tax. Apart from this the PPF also offers tax benefit under Sec80C of the Income tax Act. This means a sum of up to Rs 1.5 lakhs qualifies for a tax break under the Act.
The PPF currently offers you an interest rate of 7.1 per cent per annum, which no government bank offers on its deposits. The only place you can get a slightly higher interest rate is fixed deposits of NBFCs. The PPF is also good for those looking at a long-term investment.
It's important to remember that the Public Provident Fund is a scheme for those looking at long term investment, as it runs for a period of 15-years.
HUDCO Tax Free Bonds N3 Series
The HUDCO Tax Free Bonds are listed on the NSE and you can buy tax free bonds in a similar way you buy shares. The interest offered on the bonds is 8.10 per cent per annum, which is paid in March every year. The price of the bond is Rs 1085, which means your returns would drop to around 7.2 per cent, which is still not bad and is way higher than what bank deposits are offering.
The interest earned is tax free in the hands of investors. It's important to remember, while you can sell the bonds on the NSE, they are not very liquid. This means it is better to invest small amounts in these tax free bonds.
The bonds will mature in March 2022. They are also AAA rated and since the company is a government owned one, safety is ensured.
REC N9 Series Tax Free Bonds
This tax free bond offers you an interest rate of 8.71 per cent per annum. The same is listed on the NSE and the interest is payable in Sept every year. It's important to remember that when you buy the bond at its current markets price of Rs 1350, your yield drops to 6.5 per cent, but, than you also receive interest income in Sept 2020.
In any case, to simply put it, if you buy the bonds at a higher price your returns or yields drop. So, make sure when you are buying, you place a right price before buying. Again, a government owned company and hence safe.
About the author
Sunil Fernandes has spent 25 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. His forte remains stocks, mutual funds, commodities and tax planning.