Tax Free Bonds
- Tax Free Bonds is one the unique investment option available in India
- Interest received from Tax Free Bonds do not attract any tax
- This is over and above the Rs. 1.5 Lac limit available u/s 80 C investment limit
- More than 12% Effective Pre Tax Returns for people high tax bracket
- Risk associated with the Bonds is Moderate - low
Benefits Of Tax Free Bonds
- Issued by Government enterprises and pay a fixed coupon rate
- Interest received is completely exempt from tax
- Since the interest income is not subject to tax, investors in the higher tax bracket end up earning higher Effective Pre Tax Returns
- Since the bonds are been issued by government undertaking, credit risk is low
- Listed on stock exchanges i.e. provides an exit route before the maturity tenure
- Bonds are available both in Demat and Physical form
Returns Comparison – Post Tax & Post Inflation
|Investment Avenues||Interest Rates||Tax Rate||Returns Post Tax||Returns Post Inflation|
|Tax Free Bonds||7.5%||-||7.5%||1.50%|
Inflation Rate assumed is 6%
For FMP's we have considered 10% Tax. i.e. Excluding Indexation
Who should Invest?
Tax Free Bonds are ideal for those investors who are looking for a regular and steady source of income and also are comfortable with a long term investments as the maturity is 10/15/20 years
How to buy New Tax Free Bonds?
One can buy tax free bonds when the Bond Issue is open for subscription. The bond issues will be open only for few days. The bonds can be bought in physical or through Demat form.
One can buy Tax free bonds from Secondary market as well through stock exchanges.
How to select best Tax free bonds?
Important factors which are to be considered before investing in a Tax free bond are
1. Credit Rating
2. Coupon Rate
4. Interest Payment Frequency
Capital Gain taxes on Tax free bonds
Though the interest earned on these bonds is tax-free, any capital gain from sale of such bonds in the secondary market is taxable. If one sells the Tax Free Bonds for a price that is more than the cost then he / she would have to consider this as a capital gain. Short-term capital gains are taxed at income tax slab rate & long-term capital gains are taxed at 10% without indexation. The indexation benefits are not available for TFB