Tax Free Bonds in India - How to Invest & Its Benefits (2024)

FAQs

How to invest in tax-free bonds in India? ›

You can invest in Tax Free Bonds either through a Bond Public Issue when the Bond first enters the market or trade the existing bonds in the market through the secondary market via stock exchanges.

Investors favor municipal bonds, or "munis," for two main reasons. They are exempt from federal taxes, and they are relatively low-risk investments. While stable, income-producing bonds warrant a position in any well-diversified portfolio, there are inherent drawbacks to owning munis.

For NRIs, tax-free bonds in India are more than just another investment option. They're a strategic choice, harmonising the benefits of stable returns, tax exemptions, and portfolio diversification.

The capital gains bonds are issued by government-backed organisations like Rural Electricity Corporation or the National Highways Authority of India. 1.By investing the capital gains in Section 54EC bonds, investors can claim exemption from capital gains tax. 2.

Tax-free bonds come with a lock in-period of 10 to 20 years. The amount invested in a tax-free bond cannot be withdrawn before the expiry of applicable lock-in period. The interest income earned from these bonds are completely free from income tax. Tax-free bonds can be transacted in stock exchanges.

Investors can apply for tax-free bonds through primary or secondary markets. Features include security, stable income, higher profit potential for higher tax brackets, and a coupon rate of 5.50% to 7.50%. Tax-free bonds are ideal for senior citizens.

Tax on capital gains

If you bought the bond when it was issued at its original issue price and hold it until maturity, you generally will not recognize a capital gain (or loss). As a result, you likely won't incur any capital gains tax.

NRIs can open an RBI retail direct account to invest in government securities (G-Secs), state development loans (SDLs), and treasury bills (T-bills). However, NRIs will not be able to invest in sovereign gold bonds (SGBs) and floating rate bonds through this avenue.

How can NRI avoid tax in India? ›

When NRIs invest in certain Indian assets, they are taxed at 20% on the income earned. If the special investment income is the only income the NRI has during the financial year and TDS has been deducted, then such an NRI is not required to file an income tax return.

Government Securities

Bonds issued by the Central and State Governments are called Government security. Since these are issued by Governments they carry no credit risk. These are one of the safest types of Investment options in India to earn periodic interests and principal on maturity.

54EC bonds are AAA rated bonds and are backed by the government; hence, the risk of interest and capital payment is protected. Doorstep service for Senior Citizens and other clients.

The popular tax-free bonds in India are typically those issued by government-backed enterprises such as the National Highways Authority of India (NHAI), Indian Railway Finance Corporation (IRFC), and the Housing and Urban Development Corporation (HUDCO).

There are many tax-free investment options, investors can choose from them and deposit their hard earned money in, life insurance plans, public provident fund (PPF), new pension scheme (NPS), five year bank tax saver fixed deposit (FD), EPF, five year post office term deposit, and senior citizens saving scheme (SCSS).

RBI's Retail Direct scheme, launched in November 2021, allows individual investors to invest directly in G-Secs. To use this option, register for the Retail Direct Gilt (RDG) account with the RBI. This gilt securities account will allow you to participate in the primary issuance of many kinds of G-Secs.

Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes. * You will, however, have to report this income when filing your taxes.