Introduction

In the aftermath of IL&FS’s (Infrastructure Leasing & Financial Services) default in September 2019, many debt investors were surprised by the number of credit events, like downgrades and defaults, that continued to plague the Indian bond market. 

As a result, investors in the market started looking for safer options with low volatility to lock in the yields for the long term. Tax-free bonds were exactly what they were looking for, and as a result, there has been a resurgence in their popularity in recent years. 

What are tax-free bonds?

Tax-free bonds are a kind of government security that exempts investors from paying income tax on the interest earned u/s 10 of the Income Tax Act if the bond is held till maturity. 

Though, capital gains made upon the sale of tax-free bonds are taxable. 

Additionally, for Tax-free bonds India, tax deducted at the source (TDS) does not apply. Indian tax consultants, however, advise that investors declare their interest income.

How to buy tax-free bonds?

The last time the government issued tax-free bonds was in FY 2015. No new issues have come out since then, so the only option for investors is to buy these bonds from the secondary bond market.

In the secondary market, the options available to investors to buy these bonds are:

1. Exchanges

If investors have an existing Demat and Trading account, they can invest in tax-free bonds on the exchanges (NSE/BSE), just like they would purchase a stock. 

However, if investors do not have a Demat and Trading account, they can do their KYC and open these accounts by submitting a few documents. 

2. Broker 

If investors do not want to buy tax-free bonds directly from exchanges, they can opt for a broker.

When opting for a broker, one is advised to compare the charges levied by the brokers and the services provided. 

Moreover, investors need to be aware of the credit quality and the coupon offered by the bond. 

3. Online platforms 

One more alternative to buying a tax-free bond is online platforms. Online platforms provide easy access to all the bonds, and the buying process is seamless and quick. 

There are many online platforms out there, select the one that provides the best deal and service. One such online platform is BondsIndia.

To invest in tax-free bonds through BondsIndia, click here.  

Conclusion

Though tax-free bonds are a good idea for any investor, they are most suitable for people in the top tax bracket, like high net-worth individuals (HNIs) and senior citizens.

Tax-free bonds are best suited for individuals looking for long-term, fixed interest investments and not those who need the money soon.

Thus, before you buy bonds, consider your goals, risk appetite, and time horizon.