Understanding Tax Free Bonds
Tax free bonds are those bonds issued for long term, for investment horizon of 10 to 15 years, in which interest earned is exempt from tax. Tax free bonds do not provide any benefit of tax savings but only interest earned on these bonds is tax exempt.
Tax Free bonds
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. Let”s understand what are Tax Free Bonds.
- Tax-free bonds are rated long-tenure (usually 10-15-20 years) fixed-income securities offering annual interest.
- These bonds are generally issued by government backed entities, so low risk of default, since companies have a better credit rating.
- The interest rate, also called as coupon rate, would be less than the yield of government securities of similar tenure.. The interest rate offered by these bonds for FY 2013-14 is 8.5-9%.
- The interest on these bonds will be paid annually on a fixed date. There is NO cumulative option.
- Interest earned would be tax free, hence the name Tax Free bonds. Tax free status of interest income is as per Section 10(15)(iv)(h) of the Income Tax Act, 1961.
- There is no tax saving on the amount invested in these bonds. Section 80C,80CCF, 80D,54EC etc are not applicable.
