Tax-free bonds, as their name implies, offer a distinctive attribute: the interest earned from them is exempt from tax. This means that no matter the income bracket of the investor, there’s no necessity to pay any income tax on interest generated from these bonds. Various public undertakings utilize the issuance of tax-free bonds as a mechanism for raising funds. These establishments include the Indian Railway Finance Corporation (IRFC), Power Finance Corporation (PFC), National Highways Authority of India (NHAI), Housing and Urban Development Corporation Limited (HUDCO), Rural Electrification Corporation Limited (REC), National Thermal Power Corporation Limited (NTPC), and the Indian Renewable Energy Development Agency.
Tenure and Nature of Tax-Free Bonds
The duration for which these bonds are issued typically ranges from 10 to 20 years. To give investors an avenue to liquidate their holdings should the need arise, these bonds are also listed on stock exchanges. As for their features, tax-free bonds are secure and redeemable. However, they are non-convertible, meaning they cannot be converted into company equity or shares. It’s crucial to understand that a bond is a fixed-income instrument that carries a specified interest rate, known as the coupon rate, and has a predetermined tenure.
Trading of Tax-Free Bonds
These tax-exempt bonds are also traded on stock exchanges but only through demat accounts. If an investor sells these bonds on the exchange and realizes a capital gain, this profit is subject to taxation. Specifically, if the holding duration is less than 12 months, the capital gains are taxed at the tax rate that applies to the investor’s income.
Who Can Invest in Tax-Free Bonds?
Several types of investors have the opportunity to invest in tax-free bonds, according to the Securities and Exchange Board of India’s (SEBI) Disclosure and Investor Protection Guidelines. These investors include Qualified Institutional Investors, partnership firms, limited liability groups, trusts, co-operative banks, regional banks, and corporate companies.
Investment Facts
| Issuer | Tenure |
|---|---|
| IRFC | 10-20 years |
| PFC | 10-20 years |
| NHAI | 10-20 years |
| HUDCO | 10-20 years |
| REC | 10-20 years |
| NTPC | 10-20 years |
| Indian Renewable Energy Development Agency | 10-20 years |
Regular Investors in Tax-Free Bonds
Entities such as trusts, cooperative banks, regional banks, and corporate companies are frequent investors in these tax-free bonds. This wide range of potential investors underlines the versatility and attractiveness of tax-free bonds as an investment vehicle.
