There are many individuals who wish to purchase a tax free bond in India to save tax on interest amount. Many do not have an idea on how to go about purchasing the same.

What Are The Benefits of Buying A Tax Free Bond?

When you buy a tax free bond, the interest that you receive from this tax free bond is exempt from tax. This means that the interest does not have to be added to total income for the computation of tax.

Let's take an example. If you invest in a bank fixed deposit and you get an interest of Rs 10,000. This has to be added to total income and the tax computed accordingly.

In the case of a tax free bond the same need not be added to the total income. What this means is that the income is totally exempt from tax.

Where can You Buy Tax Free Bonds in India?

You can buy tax free bonds from your trading account, just as you buy shares. You can either call your broker and place an order or you can buy it yourself if you are trading online.

Before buying the bond it is better to check the price, interest rate, book closure date. You can do so by visiting, www.nseindia.com. In the box just click the security you wish to purchase.

After that click securities information. You will get all of the possible information including the interest rate, book closure, expiry of the bond date etc.

What is most important to note is the price and the interest rate. If you are getting an interest rate of 8.1 per cent and if you buy the bond at Rs 1100, the original price of which was Rs 1000, your yield is going to fall.

Therefore, while you may get an interest rate of 8.1 per cent your overall returns would be lower, because you are not paying Rs 1000 like the original owner, but Rs 1100.

Most of the listed bonds in India are AAA rated and are government owned. The expiry date is generally 10, 15 and 20 years from the date of issue.

So, the next time you are buying a bond make sure that you check all the details, the most important being interest rates and the bond price.

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