Tax Free Bonds Tax-Free, Secured, Redeemable, Non-Convertible Debentures
Bonds form the part of “Debt” as an asset class. This implies that the investor has given a loan to the issuing entity, and will be repaid at the end of the tenure as specified. Bond refers to a security issued by a Company, Financial Institution or Government, which offers regular or fixed payment of interest in return for borrowed money for a certain period of time.
Bonds pays pay fixed coupons, either monthly, quarterly, semi-annually or annually, till maturity (at maturity investor gets Principal & last coupon).
Tax free bonds have emerged as highly popular investment option among investors due to the taxation benefit that they offer. These bonds, generally issued by government backed entities, are exempt from taxation on the interest income received from such instruments under the Income Tax Act, 1961.
Features and Benefits of Investing:
• These bonds can be applied in Physical or Dematerialised mode
• Tenure: Choice of 10 years, 15years & 20 years
• Such bonds are likely to be listed on NSE / BSE
• No lock-in period
• Bonds upon trading on NSE/BSE, liquidity is available.
• Normally seen as safe investment.
• Could be held either in Demat or Physical form
• PAN is Mandatory
• There is no Cap on investment made in these bonds
• Retail Individual Investors get higher interest rates, so for an Individual,
• HUF to be eligible for higher rates the maximum investment amount is Rs.10 Lakhs
• The interest offered is benchmarked to the Government security of similar maturity, subject to conditions laid down by CBDT.
• Tax-Free Income
• Low risk of default, since companies have a better credit rating
• Listing of bonds on various exchanges provides liquidity to your investments
• Option of holding bonds in ‘Demat Form’ makes your investments easy to handle & monitor
• Ratings by agencies like IRRPL, BRICKWORK, CARE, FITCH, CRISIL, ICRA enables you to assess the quality of instruments
How to Invest:
• Public Issue: During the public issue of the bonds, you can invest in them by submitting a physical form furnishing the details as requested. Also, with www.sanriya.in, you can make an investment online & enjoy the ease of investing. (also get help form Brokers, distributors, advisors, agents.)
• Exchange: Post the public issue; these bonds are listed on NSE or BSE or at times on both.
Who Can Invest
• Retail Individual Investors (RIIs)
• High Net worth Individuals (HNIs)
• Qualified Institutional Buyers (QIBs)
• The income by way of interest on these Bonds is fully exempt from Income Tax and shall not form part of Total Income as per provisions under section 10 (15) (iv) (h) of I.T. Act, 1961. These bonds are generally issued by Government Backed entities and thus have very low default risk. Tax-exempt bonds usually pay lower coupons than corporate bonds as they enjoy a better credit rating and the interest received is tax-free, thus after-tax returns work out to be higher for the tax-exempt bond.
• Tax-exempt bonds enjoy a better credit rating and the interest received is tax-free, thus after-tax returns work out to be higher for the tax-exempt bond.
• The biggest draw for the investor is the tax free advantage that these bonds offer. Unlike fixed deposits, NSCs and other bonds, the interest earned from these bonds is tax free. Assuming a tax-free coupon yield of 8.2%, the implied pre-tax rate will be to the tune of 11.79% for investors in the 30% tax bracket (those earning more than Rs 10 lakh a year).
• While short term capital gains from such a sale will be taxed as normal income, long-term capital gains will be taxed at 10%. The bonds must be held for at least 12 months for the profits to be treated as long-term gains. Unfortunately for investors, the long-term capital gains from these bonds are not eligible for indexation benefit which could have cut tax.
• However these bonds do not offer any additional taxation benefits under section 80CCF of Income Tax Act, 1961. These bonds are generally issued by government backed entities.
Tax Free Bonds Issues
The Central Government (Govt. of India), in exercise of its powers conferred under Section 10 (15) (iv) (h) of the Income Tax Act, 1961, has authorized to issue tax-free, secured, redeemable, non-convertible bonds. Some of the public undertakings which raises funds through issue of tax free bonds are Indian Railway Finance Corporation (IRFC) , India Infrastructure Finance Company Limited (IIFCL), National Highway Authority of India (NHAI), Power Finance Corporation (PFC), Rural Electrification Corporation (REC), Housing and Urban Development Corporation (HUDCO), National Housing Bank (NHB), NTPC Limited, NHPC Limited, Indian Renewable Energy Development Agency Ltd(IREDA), Airport Authority of India Ltd(AAI), Ennore Port Limited(EPL), Cochin Shipyard Limited(CSL) etc.