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Tax Free Bonds – Meaning, Features & Best Tax Saving Bonds for Investment

Investors always look for opportunities to invest in avenues that can give them good returns in the long run. Along with high returns on investments, they also look for tax saving options. The tax saving investment options that are popular in terms of high return and zero taxation are tax free bonds and tax saving bonds.

If you are looking to make tax saving investments, this article will help you in learning about tax free bonds in India and its related information in detail.

Let us first understand what tax free bonds in India are.

What are Tax Free Bonds?

Tax free bonds are issued by the government enterprise. They are like financial products and includes municipal bonds. They are a low-risk investment option and offer a fixed rate of interest. What makes tax free bonds even more attractive is the fact that it makes you eligible to claim tax exemption under section 10 of the Income Tax Act of India, 1961. The money collected by the government from these bonds is invested in housing and infrastructure projects. The maturity period of these bonds is 10 years or more.

The next important question that must be arising in your mind is who should be investing in tax free bonds in India. So let us learn about the investors who can invest in tax free bonds.


Who Can Invest in Tax Free Bonds?

Investors who are looking for a fixed annual income and interest proceeds can invest in the tax free bonds. It is also a good investment avenue for investors who have a lower risk appetite and are looking to invest for long term duration. Individual investors like Hindu Undivided Family (HUF) members and Non-resident Indians (NRIs), who want to diversify their portfolio can also invest in these bonds. Furthermore, SEBI has allowed qualified institutional investors to invest in these bonds. Partnership companies and limited liability groups are also allowed to invest. In the last few years, the regular investors in tax free bonds include regional banks, cooperative banks, trusts and corporate companies.

Let us now learn about the features of tax free bonds.


Features of Tax Free Bonds

  • Exempt From Tax

The main feature of tax free bonds is that they are exempt from tax. The interest earned on these bonds is free from income tax. However, it is advisable that you must declare your interest as income from tax free bonds and not to claim the tax deduction on the investment amount. Moreover, no tax deducted at source (TDS) is applicable on tax free bonds. These bonds are beneficial for individuals who earn higher income and fall under higher tax bracket. 

  • Low Risk

Since tax free bond schemes are run by the government, the chances of default on interest payment is almost nil. This safeguards your capital and also provides you fixed annual income in the form of interest.

  • Liquidity

Tax free bonds are long term tax saving investment option and they have extended lock-in period. This suggests that you cannot liquidate tax free bonds quickly. Therefore, you must be aware of the fact that these tax free bonds cannot act as your emergency fund.

  • Lock-In Period

While investing in tax free bonds you must ensure that you will not be needing the money in the short term. This is because tax free bonds have lock-in period of 10 to 20 years. This means, you cannot withdraw your investment before the maturity period.

  • Issuance And Transaction

The tax free bonds can be purchased through a demat account or in physical form. They are traded on the stock exchange. Here you must remember that only the interest earned on these bonds is tax free and capital gains made by selling the bonds in the stock market is taxable in nature.

  • Returns

The returns on tax free bonds are dependent on your purchase price because these bonds are traded in lower volumes and have limited buyers or sellers.

  • Interest Income

The investors in the tax free bonds receive the interest on an annual basis. The rate of interest on these bonds ranges from 5.50% to 6.50%. The rate of interest can fluctuate because they are related to the current rate of government securities. The rate of interest on these bonds is very attractive considering the fact that they are exempt from tax.

Let us now have a look at few of the popular and upcoming tax free bonds of 2019.


Popular and Upcoming Tax Free Bonds of 2019

Some of the popular and upcoming tax free bonds of 2019 are HUDCO N2 Bonds, REC N7 series, HUDCO N3 Bonds, National Highways Authority Of India, REC N6 Bonds, Indian Railways N7 Series, Indian Renewable Energy Development Agency, Power Finance Corporation, etc.

Often people use the term tax free bonds for tax saving bonds and vice versa. But in reality, they both are different from each other. In this section of the article you will learn about how tax free bonds are different from tax saving bonds.


Difference Between Tax Free Bonds and Tax Saving Bonds

Under tax free bonds, the interest earned is exempt from tax under section 10 of the Income-tax Act. The lock-in period is from 10 to 20 years and you can invest up to Rs. 5 lakhs. On the other hand, under tax saving bonds the initial investment made is exempt from tax under section 80CCF of the Income Tax Act. The tax saving bonds have a buy-back clause and you can withdraw your investments after 5 or 7 years. The tax exemption for tax saving bonds is up to an investment of Rs. 20,000.

Let us now learn about investment and redemption of tax free bonds.


Investment and Redemption of Tax Free Bonds

You can make an investment in the tax free bonds through the demat account or in physical form. It is simple and hassle-free to make an investments in these highly rewarding bonds. However, you can make investment only when the period of subscription is open. Just like investing, redeeming tax free bonds is also a very simple task. You can redeem the bonds after the completion of the tenure.


Investing in the tax free bonds and tax saving bonds are highly rewarding as they involve almost no risk. If you are new to the financial market or you are looking to invest in tax free bonds or tax saving bonds, you can take the assistance from IndiaNivesh Ltd. We are the leading broking firm and financial advisors in the market. With our assistance, you can achieve your financial goals and objectives in a desired manner. 




Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.