Tax Free Bonds are a popular investment option among conservative investors in India, especially those in higher tax brackets. These bonds are typically issued by government-backed entities such as NHAI, PFC, and IRFC. What makes them attractive is the fact that the interest earned on these bonds is entirely exempt from income tax under Section 10(15)(iv)(h) of the Income Tax Act. The tenure of these bonds generally ranges between 10 to 20 years, offering a stable and predictable income source.
Though the interest rate on Tax Free Bonds is slightly lower than taxable bonds, the post-tax returns often work out better, especially for individuals in the 20-30% tax slab. These bonds are also traded on stock exchanges, offering liquidity, though prices can fluctuate with interest rate changes. For retirees, senior citizens, and those looking to diversify their debt portfolio, Tax Free Bonds provide a perfect blend of safety, stability, and tax efficiency. However, it’s important to note that fresh issues are rare and available only during special issuance windows. Investors often have to rely on the secondary market. Overall, Tax Free Bonds are ideal for those who want long-term fixed income with zero tax liability on interest income.