Things you need to know about tax-free bonds- Business News
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Things you need to know about tax-free bonds

The effective yield on 7.6% 15-year NHAI bonds for an individual in the 30.9% tax bracket is 11%

  • December 14, 2015  
  • |  
  • UPDATED   16:31 IST

National Highways Authority of India (NHAI) is set to raise Rs10,000 crore through the sale of tax-free bonds . The issue opens for subscription from 17th December to 31st December. The paper offers 7.39 to 7.6 per cent interest with 10-15 years maturities.

Tax free bonds are emerging as a popular choice for investors. Last week only IRFC got bids worth Rs 10,000 crore, which was double the application size it applied for.  Many more tax-free bonds are expected to hit the market as the financial year draws to a close.

Here is a low down to help you understand what all is offered by tax free bonds.

1) Compared with FDs, tax-free bonds comes with longer maturities of 10, 15 and 20 years.

2) Most importantly, unlike FDs the interest income is tax-free in such bonds. Therefore, the effective yield in tax free bonds is higher than FDs. Consider this  : the effective yield on 7.6% 15-year NHAI bonds for an individual in the 30.9% tax bracket is 11%. Similarly, for 10 years the effective yield on 7.39 per cent comes out to 10.69 per cent in the 30.9% tax bracket. 

3) Tax-free bonds works best for people in higher tax brackets.  You can expect stable return from such bonds in the long run as they lock in return for 10, 15 and 20 years irrespective of the interest rate moving down.

4) These bonds are not eligible for deduction under section 80C of the Income Tax Act. Moreover, short-term capital gains are taxed at normal income tax rates while long-term capital gains (from sale of bonds after more than one year) are taxed at 10% based on indexation

5) You are paid interest annually and on maturity the principal amount is paid back. But selling bonds before maturity may not offer you required amount as it depends on market conditions.

7) As the government is moving towards paperless transactions you can apply in physical as well as demat form for these bonds.

8) Tax-free bonds are tradable on BSE and NSE. Once it gets listed on the exchange you can sell them off if there is need for money.

9) Tax-free bonds are rated by credit rating agencies such as  ICRA, CRISIL, and CARE. These bonds generally assigned AAA ratings.

10) The price of  bonds vary  inversely  with  changes  in  prevailing  interest  rates. This means when  interest  rates rise, prices of fixed income securities fall and when interest rates drop, the prices increase.