As the term suggests, tax-free bonds are free from taxes. These come with a fixed rate of interest and are issued by leading government enterprises to generate income from the investment.
Tax-free bonds are financial instruments that are issued by government enterprises. The money invested in tax-free bonds is typically invested in projects related to infrastructure. For instance, municipal bonds are regarded as a kind of tax-exempt bonds. Since government bodies issue them with a fixed rate of interest, they are considered a stable investment vehicle with minimal risk.
According to Section 10 of the Income Tax Act Of India, 1961, all tax-free bonds are exempt from tax. However, if you are looking to invest in tax-free assets, you may want to know that they typically have a more extended maturity period of over ten years and more. This is because the government uses the money obtained from tax bonds to invest in housing and infrastructure projects across the country.
You can invest in the different tax-free bonds through your Demat account helps with a full-service broker such as Kotak Securities. You can also purchase tax-exempt bonds in its physical form. However, since the subscription period for tax-free investments is only open for a specific period of time, it is essential to keep an eye out for them. To invest in tax-exempt bonds in its physical form, you need to submit your identity proof, precisely your PAN number.
A large number of public undertakings provide and issue tax-free bonds. Some of the primary issuers of tax-free bonds in India include Rural Electrification Corporation, Indian Railway Finance Corporation, Power Finance Corporation, NTPC Ltd, Housing and Urban Development Corporation, Indian Renewable Energy Development Agency and NHAI. It is crucial to check the authenticity of tax-free bonds before making a purchase.
When tax-exempt bonds are released to the public, you can conduct your trading through your Demat account online or through off-line methods. However, if you wish to apply for tax-free bonds post its issuance, you can invest using your trading account. This shows that trading in tax-exempt bonds is similar to trading shares in the stock market.
To redeem your tax-free bonds, you must complete its tenure. The bonds cannot be withdrawn before its maturity dates. However, the profits that you receive from selling your tax-free bonds after it has completed its tenure is taxable under Section 112 of the Income Tax Act of India, 1961. Based on your income tax slab, the gains received after selling the bond before one year is taxable. Any and all capital gains obtained from selling tax-free bonds in the secondary markets are taxable.
But, the interest income you earn from these bonds is completely free from income tax. Typically, the interest rates on tax-free bonds range between 7.3% to 7.5% per year. However, interest rates depend on the ratings given by credit rating agencies on the tax-free bonds.
You can safely invest in tax-free bonds as they are relatively stable and offer minimal risk due to the stability of the government enterprises that issue them. If you are looking for a steady source of annual income and wish to lock in your capital for a longer tenure, tax-free bonds can be an ideal choice of investment.
