India’s Tax-Free Bonds: Term, Eligibility & Rules

Tax-free bonds are called fixed deposits in India, and these loans, regardless of the duration, do not attract any tax obligations. These opportunities are an alternative to other investment opportunities like gold or property.

What are tax-free bonds?

Tax-free bonds are those which are exempt from paying taxes. The investor can save on taxes by investing in these bonds. The interest earned on tax-free bonds is not taxed.

The Indian government has been regularly issuing tax-free bonds since 2013. These bonds are issued for 10, 15, or 20 years. These bonds’ interest rate is fixed and generally higher than the prevailing market rates.

The investment in tax-free bonds is eligible for deduction under section 80C of the Income Tax Act. The maximum amount that can be invested in these bonds is Rs 1,50,000 in a financial year.

The interest earned on tax-free bonds is paid out periodically (usually every six months). The investor can receive the interest income through cheques or direct credit to their bank account. Can Tax-free bonds be stored in physical or dematerialized form?

Read more:- indian government bonds

Eligibility for tax-free bonds

Individuals, companies, trusts, and Hindu Undivided Families (HUFs) can invest in tax-free bonds. The investment limit for individuals and HUFs is Rs. 10 lakh, while for companies and trusts, there is no limit.

These bonds have a lock-in period of 5 or 10 years, and the interest earned is exempt from income tax. The bonds are issued by public sector undertakings (PSUs) such as NTPC, PFC, and IRFC.

Read More:- convertible bonds

Important dates and deadlines to know when investing in India’s tax-free bonds

If you’re looking to invest in India’s tax-free bonds, it’s essential to be aware of some key dates and deadlines. Here are some key things to keep in mind:

-The subscription period for most bond issues opens around the 10th and closes on the last day of the month.

Bonds are typically issued on a first-come, first-served basis, so submitting your application as early as possible is essential.

-Payments are typically made semi-annually, with interest payments on June 30th and December 31st each year.

-The maturity date is typically 5 or 10 years from the date of issue.

Keep these key dates and deadlines in mind when considering investing in India’s tax-free bonds – by doing so, you can ensure that you don’t miss out on any opportunities!

Read more:- corporate bonds in india

Types of securities covered under tax-free bonds program

Tax-free bonds are those where the interest income is exempt from taxes. In India, certain infrastructure companies can raise money through tax-free bonds. The list of such entities and the type of projects for which they can issue these bonds is notified by the government from time to time.

The most recent notification was issued in December 2015 and listed 29 entities authorized to issue tax-free bonds. These include NTPC, HUDCO, PFC, REC, NHAI, IIFCL, and SIDBI, among others. The types of projects these entities can finance with the help of these bonds include power plants, transmission lines for the power sector, road projects, railway projects, etc.

Investors in tax-free bonds get a higher interest rate than similar taxable instruments like deposits with banks or corporate bonds. For example, SBI offers around 6% per annum on its fixed deposits, while AAA-rated 5-year corporate tax-free bond yields around 7%.

However, investors should remember that tax-free bond interest income is not eligible for deduction under section 80C or any other provision of the Income Tax Act.

Protection against inflation risk

One of the significant concerns when investing in any financial instrument is inflation risk. The prices of goods and services rise over time, decreasing your investment’s purchasing power. This is why it is essential to find investments that offer some protection against inflation.

One such investment is tax-free bonds. Tax-free bonds are issued by the government and offer investors a guaranteed return, making them ideal for those looking for security against inflation. The interest earned on these bonds is exempt from taxation, providing another protection against rising prices.

To be eligible to invest in tax-free bonds, you must be a resident Indian with a PAN card. The minimum investment amount is Rs 10,000, and there is no maximum limit. Interest earned on these investments is paid out annually or can be reinvested at maturity for compounded returns.

Tax-free bonds are a great way to protect your investments from the effects of inflation. With guaranteed returns and tax-free interest, these bonds offer security and peace of mind for those looking to safeguard their hard-earned money.

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