Tax-free bonds are making a comeback in investor interest, especially among those in higher tax brackets or retirees looking for stable and tax-efficient returns. These unique fixed-income instruments offer tax-free interest income, making them an attractive alternative to fixed deposits (FDs) and other savings products.
Tax-free bonds are long-term debt instruments issued by government-backed public sector undertakings (PSUs) like NHAI, Rural Electrification Corporation (REC), and Indian Railway Finance Corporation (IRFC). The biggest attraction of these bonds is that the interest earned is completely tax-free in the hands of the investor.
These bonds were last issued in 2016, but investors can still buy them in the secondary market.
Tax-free bonds have become popular because they help people, especially those in the 30% tax bracket, earn higher post-tax returns.
For example, a 6% FD return becomes only around 4.2%-4.5% after tax for someone in the highest tax bracket. But a tax-free bond giving 5.5%-6% is entirely tax-free, so the investor keeps the full return.
Unlike FDs, where premature withdrawal results in a penalty, tax-free bonds can be sold easily in the secondary market. They are extremely liquid and can be traded without exit charges.
Most tax-free bonds are AAA-rated, backed by strong government entities, and rarely face defaults, making them very secure.
In an economic environment where interest rates are falling, tax-free bonds can even generate capital gains. As the RBI has already cut rates twice, and more cuts are expected, the value of existing bonds with higher interest rates may go up, offering profits beyond interest income.
Even though no new bonds have been issued since 2016, investors can still buy existing ones through three main routes:
With a minimum investment of just ₹1,000, these bonds are accessible to most retail investors.
Tax-free bonds are especially helpful for retirees. Some older bonds offer coupon rates of 8%-9%, which translates to a solid monthly income. For example, investing ₹10 lakh in a 9% bond would give around ₹8,000/month, completely tax-free.
Even though new tax-free bonds haven’t been issued since 2016, they remain a reliable, tax-efficient, and secure investment option. Whether you're a retiree or a high-income earner, they offer steady income, high safety, and even potential capital gains. With multiple ways to access them, tax-free bonds are still worth considering for a balanced and smart investment portfolio.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.
Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
Published on: May 13, 2025, 11:38 AM IST
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