Tax Free Bonds – A Good Investment Option

Tax-free bonds launched by public sector companies are an ideal instrument for risk-averse retail investors and also for those investors who have long-term requirements. By buying Tax-free bonds, investor gives a loan to the issuing entity, and will be repaid by the entity at the end of the tenure as specified.

Under this type of bonds, investors get tax exemption on interest accrued under Section 10(15) (iv) (h) where as the investor does not get any tax exemption under Section 80C of the Income Tax Act, 1961. This bond is attractive on tax adjusted basis for investors in the high tax brackets. The investors applying for an amount of up to `10 lakh fall under the retail individual investor category and are eligible for a marginally higher coupon rate.

Tax-exempt bonds usually pay lower coupons than corporate bonds as they enjoy a better credit rating and the interest received is tax-free. Retail individual investors, qualified institutional buyers, corporate and high net-worth investors can invest in the tax-free bonds in varying proportions. The bonds are listed on stock exchanges within 15 days of the closure of the issue.

 Earlier this financial year, REC mobilised Rs. 3, 500 crore through such bonds.

 Benefits of Tax Free Bonds

  • Interest rates offered are attractive
  • It is less risky.
  • Low risk of default as companies have a better credit rating
  • Listing of bonds on various exchanges provides liquidity to investments
  • Ratings by agencies like CARE, FITCH, CRISIL, ICRA
  • Demat form makes the investments easy to handle & monitor