Tax Free Bonds and its Advantages

Tax Free Bonds and its Advantages

14 February, 2023

With plenty of investment options available today, deciding which instruments to include in your portfolio can be overwhelming. But what if there was a way to invest your funds safely while also availing of tax benefits? With tax-free bonds, you can earn interest on your investment and enjoy the benefit of not paying taxes on the same. Plus, the bonds are issued by a company, financial institution, or the government and are, therefore, a relatively safe bet. Here’s everything you need to know about tax-free bonds!

What are Tax-Free Bonds?

Tax-free bonds are fixed-income securities that are issued by public undertakings. They allow investors the chance to earn pre-fixed interest every year and are a relatively safe investment option. Additionally, the interest earned is tax-free, enabling investors to save more money. Like other bonds, the principal amount is repaid upon maturity.

Generally, you can choose from two types of tax-free bonds. While tax-free bonds allow you to earn interest that is tax-exempted, tax-saving bonds help by exempting the initial investment from taxation. The former offers higher interest payments, too.

Investing in tax-free bonds allows you to enjoy the following features:

  • You will receive interest payouts on an annual basis, and you do not have to pay tax on the same.

  • The investment tenure ranges from 10 to 20 years, depending on your requirements.

  • You can trade the bonds at any time according to the market rate. However, the profit earned will be subject to taxation under the Income Tax Act.

  • You can hold the bonds in a physical or dematerialised form.

What are the Advantages of Tax-Free Bonds?

Apart from offering you tax-free interest, these bonds also provide other benefits. They are as follows:

Regular income: When you invest in tax-free bonds, you can enjoy an assured income that is credited to you every year. The interest paid annually is tax-free and is in addition to the principal that will be returned to you upon maturity.

Safety: Since tax-free bonds are issued by public undertakings or the government, they are relatively less susceptible to default.

Ease of Trading: Tax-free bonds are listed on the stock exchange. Thus, you can easily trade your bonds as per the market price as and when the price appreciates. You can easily leverage the market appreciation to make a sizeable profit.

Higher Profit for Higher Tax Brackets: Tax-free bonds are an excellent investment option for high-net-worth individuals looking to maximise their wealth. Thus, if you fall in the 30 per cent or more tax bracket, you can earn higher returns. Plus, there is no upper limit placed on how much you can invest in tax-free bonds. Thus, you can invest more for higher returns and increased tax benefits.

Who Should Invest in Tax-Free Bonds?

Ideally, tax-free bonds are suitable for those who have a low-risk appetite or are risk-averse. Since the bonds are issued by the government or companies whose assets can act as security, there is relatively less risk associated with the investment. Plus, they are suitable for those looking to invest for a longer period, i.e. longer investment horizon. Thus, consider your financial requirements and need for liquidity before investing in a tax-free bond.

If you are looking to store your tax-free bond and other investment instruments in a dematerialised form, you cannot go wrong with the HDFC Bank Demat Account. With Free Demat AMC for First Year, low brokerage, and no paperwork, opening the HDFC Bank Demat Account takes less than 10 minutes.

Click here to open a Demat Account at HDFC Bank today!

Looking for investing? Here’s A list of Tax Saving Financial Products For You!

*Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.

Click Here To Get Started With Your Demat Account!

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