These bonds can be one of the best tool for individuals in the high tax bracket as the interest income earned on the investment is tax-free.
Tax-free bonds are most of the time issued by quasi-government institutions. So, there is almost minimal chance of a default in servicing the interest or principal amount.
Tax free bonds gets listed and they can be traded on the exchanges like BSE and NSE. However, redeeming the bond before maturity may not fetch the required amount as it is dependent on market conditions.
2) Capital Gains
If the bonds are sold before one year period, the gains will attract capital gains tax as per tax slabs of the individual. If sold after one year, it will attract 10 per cent of profit with indexation and 20 per cent without indexation
3) Interest rate
Interest rate called as coupon rate is linked to the prevailing rates of government securities. So, it can be a good bet when the bank interest rate are falling. Tax-free bonds interest is credited annually directly to the bank account of the investor.
4) Holding of Bonds
One can hold the bonds in demat form as well as physical form.
Tax-free bonds do not fall under 80C Income Tax Act, which means any amount invested will not be eligible for tax deductions. No Tax is Deducted at Source as in any case the interest income is tax-free.
6) Tenure of the Bonds
Tenure of the bonds will be for ten or fifteen or twenty years.
Individuals who are planning to invest in tax-free bonds should be aware that liquidity is not high when compared to other debt instruments.