Tax-free bonds are gaining popularity among investors, especially with expectations of the RBI reducing interest rates. These bonds are an appealing option for those looking for safe investments with regular income. Available for trading on BSE and NSE, these bonds offer an additional benefit – their interest is completely tax-free. This makes them particularly attractive to individuals in higher income tax slabs.
Issued by Government-Backed Companies
A total of 14 government infrastructure companies, including NHAI, IRFC, and Power Finance Corporation (PFC), have issued these tax-free bonds. They were originally issued between 2012 and 2016 with terms ranging from 10 to 20 years. The bonds also come with a high ‘AAA’ rating, signifying safety and reliability. Investors can earn regular interest payments without worrying about losing their capital, as these bonds are backed by government guarantees.
Trading and Returns on NSE and BSE
These bonds are traded on both NSE and BSE, offering a safe investment option with consistent income. Out of 193 series, 92 have already matured, while the rest are actively traded. Investing in these bonds is suitable for individuals seeking security along with a reliable income stream.
What To Consider Before Investing
When investing in tax-free bonds, it’s important to look for high liquidity and good yield to maturity (YTM). YTM refers to the expected annual return if the bond is held until maturity. According to HDFC Securities, some bonds have low liquidity, but there are 20 series that offer high YTM and better liquidity, making them attractive for potential investors.
Tax-Free Bonds: A Good Deal for High Tax Brackets
For investors in higher tax slabs, tax-free bonds can be especially beneficial. As per HDFC Securities, 15 bond series offer a stable YTM of 5.5% to 5.9%. This compares favorably to corporate bonds or bank fixed deposits. While corporate bonds and FDs offer taxable interest, the tax-free nature of these bonds results in a higher post-tax return, especially for those in the 30% tax slab. Investors in such tax brackets may receive returns of 5.1% or 4.3% from corporate bonds or FDs after taxes, making tax-free bonds a much better option.
