There are a deluge of tax free bonds that are issued from time to time. At the moment, we have the tax free bonds from National Bank For Agricultural and Rural Development In India (NABARD) that is slated to open shortly.
In fact, even the IFRC Bonds open for subscription today. The one problem for these tax free bonds is that the tenure is generally for 10 years, 15 years and 20 years. This always leaves us with the question: How Do I Sell These Tax Free Bonds In India when I need the money?
It's important to remember that anything sold through the recognized stock exchanges, must be done in the electronic form. You cannot sell things in the physical form through the exchanges. This means that when you apply for tax free bonds, they should be in the electronic form.
Things to note when you want to sell tax free bonds in India:
1) Capital gains tax will apply
Many individuals things that tax free bonds are also free from capitals gains. This is not true. You would need to pay capital gains tax if you make a profit from the sale of these bonds, though the interest earned on these bonds are tax free.
2) Poor liquidity
If you think that you are going to be able to sell 10,000 bonds at a time in quantity, just forget it. At best you maybe able to sell a few 100 bonds every day. Also, the price discovery is not great, hence you may not get a great price.
3) Apply only for the long term
Apply in these bonds only if you are a long term investor. For example, if you are going to need the money anytime shortly, you are better off investing in other instruments. This is because, there is poor liquidity and you do not want to sell at any price in desperation.
4) Only in the demat form
It is important to remember that when you want to sell the tax free bonds in India, through the recognized stock exchanges, you must have these in the demat form. So, when you apply for these bonds, you must do it in the demat and not the physical form.
Remember when you want to sell a tax free bonds in India, the manner to sell the same is similar to shares. You may talk to your broker, who could assist you in providing all the relevant details.
Tax free bonds are bonds that are free from income tax in India. What this means is that the interest is totally exempt from tax. Generally those in the highest bracket tend to apply for these bonds. At the moment the interest rate on these bonds are closer to the 7-7.75 range. Since they are tax free the post tax returns work out to being much higher than bank deposits. In any case they are good instruments for people who look at long term investment.