'Tax-Free Bonds' also known as 'Tax-Exempt Bonds' and 'Municipal Bonds' are issued by the government by offering tax free return to the investors
along with many more advantages. Government usually offers Tax-Free Bonds/Municipal bonds to raise additional money for its infrastructural
development needs. Due to the benefits they offer Tax free bonds have come
out as a most loved investment option for investors looking for low risk.
Particularly in an emerging economy like India, where we have limited choice of
instruments to have tax-free income. The most popular tax free return
instruments in India include PPF (Public Provident Fund) and Tax Free bonds.
Here we have prepared a list of ten to know everything about such bonds.
Top 10 Features
of Tax-Free Bonds
1. Understanding Tax-free Bonds: 'Tax-Free Bonds' are generally issued by enterprises
governed by the government with a promise to pay a fixed coupon rate
(also known as interest rate) over a stipulated period of time.
As Tax-free Bonds are invested in infrastructure and other projects,
they have a long-maturity term may be 10 years,
15 years, 20 years or even more.
2. Suitability: 'Tax-Free Bonds' are
suitable for those investors who wants steady passive income annually and for
those who do not need their capital back over a long period of time.
3. Benefits of Tax Exemption: The return on account of interest generated on
tax-free bonds is fully exempted from income tax i.e. an investor does not need
to pay tax on its interest. In fact the interest availed from 'Tax-Free
Bonds' does not form part of total income of an individual.
Neither there is any deduction of tax at source (TDS) from bondholders.
However it should be noted that no such deduction would be available for the
amount of investment.
4. Coupon (Interest) rate: One of the advantages of 'Tax-Free Bonds' is pre-fixed coupon (interest) rates where
these bonds are linked to the on-going rates of government securities.
Therefore Tax-Free Bonds' become attractive where there is high
interest rates in the financial system of an economy.
5. Payment of Interest : The interest payable on these bonds is usually paid
annually and directly credited in the bank account of the
bondholder.
6. How does Fixed deposits (FDs) differ
from 'Tax-Free Bonds' : The interest availed on Fixed deposits (FDs) with bank and
other similar bonds are added to the gross total income of an investor
which is taxed as per the income-tax slabs prevailing in an economy. As
discussed above interest earned from 'Tax-Free Bonds' are not
taxed, bondholders in higher tax slabs mostly earn a better post-tax return
than that of Fixed deposits (FDs). But it should also be noted, the
bank Fixed deposits (FDs) in terms of liquidity get a
better score over 'Tax-Free Bonds' because these bonds
have usually a longer maturity period.
7. Low Credit risk: As tax-free bonds are usually issued by government-linked companies, the
credit risk i.e. risk of non-repayment is very low or negligible.
8. Liquidity: The tax-free bonds are traded in the stock exchange(s) only after they are get listed, at the same time investors in 'Tax-Free Bonds' may not enjoy high liquidity. Most of the 'Tax-Free Bonds' are of long-term maturity tenure.
9. Need of Demat Account: you need a demat account to invest in 'Tax-Free
Bonds', however these bonds could be issued both in demat and
physical mode, so one does not need demat account when he buys it
in physical mode.
10. Capital Gain on 'Tax-Free Bonds' : Bondholders may buy and sell these 'Tax-Free
Bonds' on the stock exchanges of the country. As discussed the
interest availed on these bonds is tax-free but any profit during the course of
sale it in the secondary market will be taxable under the head of Capital
Gain.
Upcoming posts related
to 'Tax-Free Bonds';
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- Tax
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- Ireda
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- Tax
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(Disclaimer: I am not an expert on tax free bonds so investors are
instructed to make their own assessment before acting on the information
provided by this blog.)
Nice blog,Thanks admin for sharing this information.
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