Don’t you look for investments with high returns? You do! I do! Everyone does!
Let’s understand one such investment: Tax-free bonds. These are among the most popular instruments due to the benefit of no tax on the interest earned (returns).
So, what are tax-free bonds?
These are securities that offer regular or fixed interest payments in return for borrowed money. The interest earned is completely tax-free u/s 10. Tax-free bonds come with a long-term maturity period of 10, 15, and 20 years.
Who provides/issues these bonds?
Government entities like NHAI, REC, PFC, etc. issue tax-free bonds to raise money for various projects like infrastructure and housing.
How are these bonds issued?
One can buy these bonds in the Demat form or in the physical format when the subscription window opens for investors. But remember that these bonds are available for a limited time. Once the issue is over, these bonds are listed on the BSE & NSE and hence can be traded in the secondary markets, just like normal bonds.
What are the features of these bonds?
- Tax-Free: The interest earned is completely tax-exempt.
- Safe and Steady Income: Since these are government-backed instruments and the rate of interest is predetermined, you know exactly how much income you will receive and the chances of default on payment are quite low.
- Liquidity: Tax-free bonds cannot be liquidated as quickly as other asset classes. But since tax-free bonds are listed on BSE and NSE, one can buy tax-free bonds from stock exchanges.
Thus, tax-free bonds are ideal for people with a risk appetite, high net-worth individuals looking for a steady source of annual income, and those who can afford to lock in their capital for longer tenures.
Though the interest received from these bonds is not taxable, any profits derived by selling these bonds in the secondary market are liable to taxes under the head Income from Capital Gains.
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