Tax free bonds are among the few instruments in the country, where the interest earned is tax free in the hands of investors. These bonds are sought after among high networth individuals, who are in the highest tax bracket.
Why to buy tax free bonds in India?
Let us say that your are in the 20 and 30 per cent tax brackets and you earn an interest rate of 50,000 from your bank deposits. Those in the higher tax bracket would end up paying almost 15,000 as taxes on interest income, thus reducing your yields. Take a look at the list of tax free bonds that have decent interest rates and where the interest is tax free.
|Name||Interest rate||Interest payment||Expiry of bonds|
|HUDCO N2 Series||8.2%||March every year||March 2027|
|HUDCO N5 Series||7.51%||Feb every year||Feb 2028|
|IRFC N9 Series||8.48%||Feb every year||Feb 2024|
|IRFC NA series||8.65%||Feb every year||Feb 2029|
|RECN6 Series||8.46%||Sept every year||Sept 2028|
|RECNF Series||8.88%||March every year||March 2029|
|NHAI N6 Series||8.75%||Feb every year||Feb 2029|
Do not go by the interest rates on these bonds alone?
Remember these interest rates are on the original bond price of Rs 1,000. Now, if you have to buy these bonds they are listed on the stock exchanges and have to be purchased from there. Most of these bonds were issued at a face value of Rs 1,000.
Let's take an example. The original subscriber to the Indian Railways Finance Corporation (IRFC) N9 series bond paid only Rs 1,000 and is today getting a solid returns of 8.48% coupon. However, since interest rates have fallen since these bonds were issued, he is going to sell at a higher rate than Rs 1,000.
The IRFCN9 Bonds are now traded at Rs 1,250, which means your returns would drop, as you would buy lesser amount of bonds. So, an individual needs to work the right price to buy these bonds. Those in the highest tax bracket should at least aim for post tax returns of 6 per cent or else it is now worth buying the bonds.
Safety and security of tax free bonds
These bonds are highly secure as they are backed by Government of India owned institutions. Some of the bonds mentioned above have a long tenure. You can sell these bonds on the stock exchanges just as you buy them. However, it is pertinent to note that in some cases the volumes of trading could be thin. Say for example, if you wish to buy 1,000 bonds at a certain price, it may not be available. In some cases they may not be traded at all. We suggest you look for ones that are closer to maturing. The above list that we have provided of tax free bonds is not exhaustive by any means. Apart from tax free bonds, there is the PPF and the ULIPs where the interest or the returns as the case maybe are free from tax. Of course, we also have the EPF and the VPF where after a 5-year period of continuous work, the interest earned is tax free in the hands of investors.
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, mutual funds and tax planning.