Tax Free Bonds

Bonds are a kind of debt instrument. By investing in this type of asset, the investor gives a loan to the issuing entity. The investors will be repaid at the end of the tenure.

There are different kinds of bonds. Those bonds which are exempt from taxation on the interest income under the Income Tax Act, 1961 are called tax-free bonds. These are usually issued by government-backed entities.

Tax-free bonds have emerged as a highly popular investment option among investors. Here’s a look at some of its benefits:

• Taxation: Interest earned from investments is often eligible for taxation. However, investors do not have to pay any tax on the interest earned through tax-free bonds. Thus, after-tax returns are higher for the tax-exempt bond. They also have a lower risk of default, as these companies are usually Government-backed entities.


• High Post Tax Returns: As the interest is Tax Free, investors get higher post tax returns as compared to fixed deposits.


• Liquidity: Listing of bonds on various exchanges provides liquidity to your investments.


• Electronic access: Option of holding bonds in 'demat form' makes your investments easy to handle and monitor.


• Credit rating: Agencies like CARE, FITCH, CRISIL, ICRA regularly asses companies and their financial health. They then issue a credit rating. Higher the rating, better the financial health. These agencies also issue credit ratings to tax-free bonds. This enables you to assess the quality of instruments.

Public Issue: During the public issue of the bonds, you can invest in them by submitting a physical form furnishing the details as requested.

Exchange: Post the public issue, these bonds are listed on NSE or BSE or both. You can invest in these bonds through your Shriram Insight trading account the way you invest in shares.