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Tax-Free Bonds in India



Tax-free bonds are the financial instruments issued by the Government to collect the money to arrange to fund for the long term projects like Construction projects, Railway projects etc. or any other project that Government may think of it. Under the scheme of tax-free bonds, the Government takes the money from the investors and gives them interest on an annual basis. Retail investors are also allowed to invest in the schemes of tax-free bonds.


Few examples of such tax-free bonds are National Highway Authorities of India, Indian Railways, Finance Corporation, Rural Electrification Corporation Bonds etc.


Benefits of tax-free bonds

  • High rate of interest Tax-free bonds issued by the Government gives a fixed rate of interest. These tax-free bonds generally offer a high rate of interest (7% to 8% approx.).

  • Low default risk Since the Government issues these bonds, there is less risk of default with the investor.

  • Exemption of interest These bonds are fully exempted from tax, i.e. 100% tax-free. Therefore, income earned from these tax-free bonds in the form of interest is exempt from taxation.

  • No TDS Deducted on Interest No TDS is deducted on the interest income earned on these tax-free bonds because such income is exempted under the Act.

Disadvantages of tax-free Bonds

  • High Lock-in Period Since these bonds are issued by the Government to finance its long term projects so the lock-in period of the investment money is also high such as 10 to 20 years.

  • Liquidity issue Since the lock-in period of the amount of investment into these bonds is high, there is an issue of liquidity as the investor cannot withdraw the amount between the lock-in period. Therefore, the investor has to wait till the completion of the lock-in period to get his money.

  • Debt Instrument These types of bonds are debt instruments, and they will not give the benefit of equity instruments. These bonds are specially for those investors who cannot bear any risk in the investment market.


Procedure for investment in tax-free Bonds

These bonds are traded in Stock exchanges like NSE/BSE. Any investor can buy or sell these bonds in stock exchanges through their Demat Account. You can purchase these bonds from there as if you buying shares. You can also buy these bonds offline through physical mode by providing your essential documents like PAN Card, Aadhar Card etc.


Who should invest in tax-free bonds?

Tax-free bonds are an excellent choice for investors looking for fixed income like senior citizens. As government enterprises typically issue these bonds for a longer tenure, default risk is very low in these bonds. You are assured of a fixed income for a more extended period, typically ten years or more. The government enterprises invest the money collected through the issuance of these bonds in infrastructure and housing projects. Therefore, tax-free bonds are the right choice for investors falling in the highest tax bracket.


What are the commonly found tax free bonds?

Many public sector undertakings issue tax-free bonds. National Highway Authority of India, NTPC Limited, Indian Railways, and Rural Electrification Corporationare some of the most popular ones. Other examples are Housing and Urban Development Corporation, Indian Renewable Energy Development Agency, Rural Electrification Limited, and Power Finance Corporation.


Redeem tax-free bonds

Redeeming tax-free bonds is a relatively simple process, provided you have completed the tenure. However, you cannot withdraw your bond before 10-20 years, but only trade it on other stock exchanges with other investors.



At Itseki Mercurius India, we assist our clients with various income tax compliances, including income tax assessments, TDS returns, ITR filings, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about tax-free bonds in India, kindly contact us.

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