If you are planning to invest these days in a place where you can invest in higher returns than fixed deposits and you can avail tax exemption, then you can invest in tax-free bonds. By investing in it, your money is safe and you also get a fixed return. These bonds are issued by the government for a specific purpose, so they have the sovereign guarantee of the government. Today we are telling you about tax free bonds.
What is a Tax-Free Bond? It is a kind of date instrument. When companies need money to expand their business, they issue such debt instruments, which are called bonds. The bond is listed on the stock market. A tax-free bond is different from a normal bond because its returns are not taxed. There is no maximum investment limit in this.
Who issues tax free bonds? Generally, tax-free bonds are issued only by companies backed by the government. These companies are allowed to issue tax-free bonds under section 1961 of the Income Tax Act. Public Sector Undertaking companies also issue tax-free bonds like HHI, NTPC, NHPC, HUDCO etc.
Tax exemption is available on the returns earned on tax-free bonds. Generally, interest income on FDs, NSCs and other bonds is taxable, while interest income on tax-free bonds is not taxable. However, there is no exemption on the principal amount. Being listed in the stock market provides liquidity in investments. It is also easy to handle or monitor by getting it in the form of demat.
Tax-free bonds typically have a minimum tenure of 5 years. At the same time, some have a longer lock-in period than this. Tax-free bonds are available on the exchange. So you can buy these bonds from Bombay Stock Exchange and Nifty Stock Exchange. All bonds offer an interest rate, the rate at which interest is paid annually.
Many people think that tax free bonds and tax saving bonds are the same thing but this is not true. These two are different. In case of tax saving bonds, tax benefit under section 80CCF of the Income Tax Act is available on the principal amount invested in these bonds in a financial year.
On the other hand, the interest income earned in tax free bonds is completely tax free. You do not have to pay any tax on the income earned on investing in these bonds, whereas the interest on tax saving bonds is taxed.
If you fall in a high tax bracket and are planning to invest in FD these days, then tax free bonds are a better option for you as the returns from it are tax free. Apart from this, you can get your money back by selling this bond whenever you want. Whereas this is not the case in FD.
In this, if you break the FD ahead of time, then you have to pay a penalty. Whereas if you invest in tax free bonds, you can sell it before maturity. With this you will not have any shortage of liquidity. Apart from this, here you get more returns than FD.