You can invest in tax-free bonds for a good and secure return, on which you also get the benefit of tax exemption.

 You can invest in tax-free bonds for a good and secure return, on which you also get the benefit of tax exemption.

If you are planning to invest in a place these days where you can get a higher return than a fixed deposit and also get the benefit of tax exemption, you can invest in a tax-free bond. Investing in it saves your money and you also get a fixed return. These bonds are issued by the government for a special purpose, so the government has a sovereign guarantee on them. Today we are telling you about tax free bonds.

You can invest in tax-free bonds for a good and secure return, on which you also get the benefit of tax exemption.

What are tax-free bonds?

It is a kind of instrument. When companies need money to expand their business, they issue this type of debt instrument, called a bond. Bonds are listed on the stock market. Tax-free bonds differ from ordinary bonds in that their returns are not taxable. There is no limit to the maximum investment that can be made.

Who can issue tax free bonds?

Tax-free bonds are usually issued by government-backed companies. 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, such as HHI, NTPC, NHPC, HUDCO etc.

Returns from tax-free bonds are tax deductible

Returns on tax-free bonds are tax deductible. Interest on income from FDs, NSCs and other bonds is generally taxable, while income from interest on tax-free bonds is tax-free. However, there is no discount on the principal amount. Being listed on the stock market makes investing easier. Meeting as a demat also makes it easier to handle and monitor.

It has a lock-in period

The lock-in period of a tax free bond is usually 5 years. As well as some bonds have longer lock-in periods.

Tax-free bonds good for anyone

Pankaj Mathpal, a personal finance expert and founder and CEO of Optima Money Managers, says tax-free bonds are suitable for those who want higher interest rates than fixed deposits on investments, but do not want to take risks. Get a stable but secure return on it. Apart from that it is also suitable for taxpayers who fall into the high tax bracket i.e. 20% or more tax bracket.

How to invest in it

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, which is the rate at which annual interest is paid.

The gap between tax free bonds and tax saving bonds

Many people think that tax free bonds and tax saving bonds are the same but that is not true. They are both different. In the case of tax saving bonds, the tax benefit under section 80CCF of the Income Tax Act is paid on the principal amount. Which is invested in these bonds in a financial year.

Interest income on tax-free bonds, on the other hand, is completely tax-free. You do not have to pay any tax on the income earned on investing in this bond, while the interest on the tax saving bond is taxable.

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Better option than FD

According to Pankaj Mathpal, if you are in the high tax bracket and are planning to invest in FDs these days, a tax free bond is a good option for you as the returns are tax free. In addition, you can withdraw your money by selling this bond whenever you want. While this does not happen in FD.

If you break the FD ahead of time, you have to pay a penalty. When you invest in tax free bonds, you can sell them before maturity. This will not reduce your liquidity. Plus here you get a higher return than FD.