Tax-free bonds are a good option for salaried individuals and investors to save taxes. These are secured, redeemable, non-convertible and issued by public sector undertakings which means that safety is high. These bonds are long-term in nature with maturity periods ranging from 10 to 20 years. The coupon rates are linked to the prevailing 10-year government security yield.
The current financial year has, so far, seen bond issues from organisations such as Indian Railway Finance Corporation, Power Finance Corporation, Rural Electrification Corporation (REC), Housing and Urban Development Corporation (HUDCO) and India Infrastructure Finance Company. The salient features are:
The income by way of interest on these bonds is exempt from tax, and shall not form part of the total income; there will be no deduction of tax at source from interest which accrues to bond-holders irrespective of the amount of interest or the status of the investors; wealth tax is not levied on investment; and safety is ensured as the bonds are mainly issued by public sector undertakings backed by the Government of India.
There is adequate liquidity available as these are listed on the stock exchanges. Investors should choose to subscribe to the demat option if they wish to exit by selling the bonds in the market.
The investment limit for retail individual category has been enhanced to Rs. 10 lakh from Rs. 5 lakh earlier.
Since interest earned on these bonds is fully exempt from income tax, these products are attractive for investors in the highest tax bracket.
Most of the institutions, which came out with their first tranche of bond issues, have come out again with their next tranche to hit their borrowing targets for the current financial year.