Tax free bonds as investment option

Tax-free bonds have always been a favourite with 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. However these bonds do not offer any additional taxation benefits under section 80CCF of Income Tax Act, 1961. 

Tax-exempt bonds generally pay lower coupons than corporate bonds as they 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.

Benefits of Investing: 
  • Tax-Free Income 
  • Low risk of default, since companies have a better credit rating 
  • Listing of bonds on various exchanges provides liquidity to your investments 
  • Option of holding bonds in 'Demat Form' makes your investments easy to handle 
  • Ratings by agencies like CARE, FITCH, CRISIL, ICRA ensure the quality of instruments 

Methods to Invest:
  1. Public Issue: During the public issue of the bonds, you can invest in them by applying directly through physical form and  furnishing the details as requested. 
  2. Exchange Trading: Post the public issue; these bonds are listed on NSE or BSE or at times on both for trading. 

Other Tax-Saving Options
As per the recently introduced Section 80-CCG, RGESS scheme is available only to a "New Retail Investor" on investments in the 'Eligible Securities' and offering tax exemption up to Rs. 25,000.