Tax-Free Bonds in India are issued by Government to collect money for long term projects like Construction projects, Railway projects or any other project which government may think of. Government takes the money & gives interest to investors annually. Government allows Retail Investors to invest in Tax- Free Bonds.
These bonds give fixed rate of interest to investors. This will give regular income to the retail investors like Senior Citizen.
Examples of few Tax-Free Bonds are National Highway Authorities of India, Indian Railways Finance Corporation, REC Bonds etc.
Benefits of Tax-Free Bonds:
1. Higher Rate of Interest: Tax Free bonds gives fixed rate of Interest. Tax-Free Bonds Offers a high rate of interest (7 to 8% approx.).
2. Low Risk of Default: Since these bonds are issued by the government, chances of default are very low.
3. Tax Exemption: These bonds are 100% Tax Free. Amount invested in these bonds is exempt. Investor get tax benefit by investing into these types of bonds.
4. Interest Exemption:Interest income earned from these bonds is also exempt. Investors get Interest income on these bonds directly into the bank accounts.
5. No TDS Deducted on Interest: Since Interest Income earned on Tax Free bonds is Exempt so there no TDS is deducted on Interest Income.
Disadvantages of Tax-Free Bonds:
1. High Lock-in period: Since the government issues these bonds for long term purpose so the lock-in period of these bonds is also High such as 10 to 20 years.
2. Liquidity: Since these bonds have a high lock-in period the liquidity is very low. You can’t withdraw your money in between. You have to wait until the lock-in period is over.It is advisable to Investor that you should Invest in Tax Free bonds only if you can wait till its maturity.
3. Debt Instrument:These Tax-Free bonds are debt Instrument so it will not give you benefit of Equity Instrument. These types of bonds are specially for those Investors who can’t take High Risk & wants to play safe.
Procedure to Invest in Tax Free Bonds:
These bonds are traded in Stock exchanges like NSE/BSE. Any Retail Investor can buy or sell these bonds in stock exchanges through their Demat Account. You can buy from there as if you buying shares. You can also buy these bonds offline through physical mode by providing your basic documents like PAN Card, Aadhar Card etc.