Tax Free Bonds 2014

Tax free bonds have emerged as highly popular investment option among investors due to the taxation benefit that they offer. These bonds, generally issued by government backed entities, are exempt from taxation on the interest income received from such instruments under the Income Tax Act, 1961.


Tax Free Bonds Features:

• Tenure: Choice of 10 years, 15years & 20 years
• Proposed to be listed on NSE / BSE
• No lock-in period
• Bonds are Tradable in NSE/BSE, hence liquidity is available
• Bond Issues are Secured in nature, hence safe investment
• Either in Demat or Physical form
• PAN is MandatoryTax Advantage

Tax-exempt bonds enjoy a better credit rating and the interest received is tax-free, thus after-tax returns work out to be higher for the tax-exempt bond.

The biggest draw for the investor is the tax free advantage that these bonds offer. Unlike fixed deposits, NSCs and other bonds, the interest earned from these bonds is tax free. Assuming a tax-free coupon yield of 8.2%, the implied pre-tax rate will be to the tune of 11.79% for investors in the 30% tax bracket (those earning more than Rs 10 lakh a year).

While short term capital gains from such a sale will be taxed as normal income, long-term capital gains will be taxed at 10%. The bonds must be held for at least 12 months for the profits to be treated as long-term gains. Unfortunately for investors, the long-term capital gains from these bonds are not eligible for indexation benefit which could have cut tax.

Who can invest:

Retail Individual Investors (RIIs)
High Net worth Individuals (HNIs)
Corporates/Trusts
Qualified Institutional Buyers (QIBs)