Tax free bonds were issued by government owned companies a few years ago and offer an annual interest rate with tax free income. What this means the interest which is paid is tax free in the hands of the investor. Here are 4 tax free bonds that offer tax free income in India. The bonds are listed on the stock exchanges and can be bought and sold.
8.46% REC N6 Tax Free Bonds
The Bonds issued by the Rural Electrification Corporation of N6 series offers an annual interest rate of 8.46 per cent. The bonds were issued in 2013 and expire in 2028. The REC N6 Tax Free Bonds are traded on the National Stock Exchange and hence can be bought and sold.
The interest on these bonds are payable in September every year. The REC N6 Bonds are AAA rated and in any case since REC is a government backed institution the bonds are safe. The price currently is Rs 1,300, which means your yields would drop significantly if you purchase at such high levels given that the face value is just Rs 1,000.
HUDCO 8.2% N2 Series Bonds
This bond is again listed on the NSE and can be purchased from the same. The HUDCO 8.2% N2 Series Bonds offer an interest rate of 8.2 per cent, which is paid annually. The bonds were issued in March 2012 and would expire in March 2027.
They are AA rated, but, since HUDCO is a government institution we do not expect any default as such. The bonds are currently traded near that Rs 1,200 mark, which means your yields would fall much lower than the 8.2 per cent.
The one important thing to note with tax free bonds is that they might not be very liquid and hence you can buy and sell in small quantities.
8.01% REC N5 Series Bonds
The REC N5 Series Bonds offer an interest rates of 8.01 per cent, which is much lower than that of the previous series mentioned above. The bonds are currently quoted at Rs 1,200 on a face value of Rs 1,000, which means your yields would drop to 6.4 per cent, if you were to buy the bonds at Rs 1,200.
However, even a 6.4 per cent post tax yield is very attractive for those in the highest tax bracket. It's very important to buy tax free bonds at lower prices, so that the effective yield goes higher.
HUDCO 8.1 % N3 Series
The N3 Series tax free bonds from HUDCO are offering an interest rate of 8.1 per cent. The bonds were issued in March 2012 and will expire in March 2022. The bonds are traded at around the Rs 1,100 mark, which means your yields could fall to 7.2 per cent, which is still better than what banks are offering on FDs.
Apart from this, the interest on bank deposits is taxable, while the interest on tax free bonds is exempted from tax. Not a bad bet for those willing to hold till maturity of the bonds.
About the author:
Sunil Fernandes has spent 26 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, debt, commodities, mutual funds and tax planning.