Everything you need to know about Tax-Free Bonds

As the name suggests, Tax-free Bonds are financial instruments which offer Tax relief to the investors by way of exemptions in Income Tax. These bonds have emerged as a popular choice among investors due to the taxation benefit it offers.

Tax-free bonds are generally issued by government enterprises and have a fixed interest rate. As the proceeds from the bonds are invested in infrastructure projects, they have a long-term maturity of typically 10, 15 or 20 years. Being liquid, these bonds are tradable in the secondary market and are listed on exchanges. They carry credit ratings from one of the rating agencies approved by SEBI as well as Reserve Bank of India (RBI).

The following shall be eligible to subscribe to the bonds:

  • Retail Individual investors (RIIs)- individual investors, HUFs (through Karta) and NRIs on repatriation as well as non-repatriation basis can apply up to Rs. 10 lakhs in each issue.
  • Qualified Institutional Investors (QIBs)- as defined by the SEBI guidelines 2000.
  • Corporates including statutory corporations , trusts, partnership firms, Limited liability Partnerships , Co-operative banks, Regional Rural Banks and other legal entities, subject to compliance with their respective Acts.
  • High Networth Individuals- Resident Individual Investors whose investment exceeds Rs. 10 lakhs in an issue.

You should consider investing in tax free bonds as

  • These bonds have very low default risk as they are issued by government-backed entities.
  • Credit agencies rate these instruments after assessing the financial health of the entities issuing the bonds.
  • The minimum denomination can be from as low as Rs 1,000.
  • At times when bank fixed deposit rates are coming down, tax-free bonds are an attractive option.
  • Retail investors can invest up to Rs 10 lakh in each issue.
  • Investors can exit from these tax-free bonds before maturity by selling them on stock exchanges.

Bond issuing entities are:

  • National Highways Authority of India (NHAI)
  • Indian Railway Finance Corporation (IRFC)
  • Housing and Urban Development Corporation Limited (HUDCO)
  • Indian Renewable Energy Development Agency (IREDA)
  • Power Finance Corporation (PFC)
  • Rural Electrification Corporation (REC)
  • National Thermal Power Corporation Ltd (NTPC)


These bonds are completely tax free but capital gains made on selling of tax-free bonds on stock exchanges are taxed. If the holding period is less than 12 months, capital gains on sale of tax-free bonds on stock exchanges are taxed as per the tax slab of the investor. If bonds are held for more than 12 months, the gains are taxed at 10 per cent. 

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