Are you looking for ways to buy Tax-Free bonds? Follow the guide to know how you can do it. We shall also see what tax-free bonds and what role they play in the whole tax scenario and what benefits they bring with themselves. Let us begin.
What are Tax-Free bonds?
Tax-free bonds are debt instruments issued by entities backed up by the government, primarily to fund infrastructure and public development projects. Their main feature is that the interest earned by bondholders is entirely exempt from income tax under Section 10(15) of the Income Tax Act, of 1961. These bonds typically offer fixed, stable returns over long maturities (10-20 years) and are considered low-risk due to government backing, making them a great catch for individuals in higher tax brackets seeking secure, tax-efficient income. While interest is tax-free, capital gains from early sale are taxable for everyone. Thus, make sure you go through the eligibility criteria for exemption in anything here.
Steps to buy tax-free bonds
Do you want to buy tax-free bonds? You can follow these steps and make it work!
- Create Accounts: Secure a Demat account for electronic bond holding and a linked trading account through a trusted stockbroker or financial institution that you know you can trust.
- Conduct Due Diligence: Research and identify tax-free bonds issued by credible government-backed entities like NHAI, REC, PFC, etc. Evaluate their credit ratings, prevailing interest rates, and maturity durations to match your investment objectives, which you should create beforehand.
- Determine Acquisition Method: For Primary Market, participate in new public offerings when available, subscribing directly from the issuer during the designated period. And for Secondary Market, you can more frequently acquire bonds already listed on major stock exchanges using your trading platform, just like purchasing equities.
- Initiate Purchase: Place a buy order via your broker’s online interface or by contacting them directly, specifying the desired bond and quantity.
- Finalize Transaction: Ensure adequate funds are available in your linked bank/trading account. Upon successful completion, the bonds will be credited to the Demat account that you are considering.
- Oversee Portfolio: Regularly review your Demat account to confirm receipt of tax-exempt interest payments, typically disbursed annually or semi-annually. Closely view the guidelines about them to be clear.
Things to remember while buying tax-free bonds
Although there is no hard and fast rule regarding this, you can definitely keep a few things in mind while buying tax-free bonds –
- Credit Rating: Prioritize AAA-rated bonds for the highest safety.
- Maturity Period: Tax-free bonds are long-term (10-20 years). Therefore, ensure it completely goes with your financial plan.
- Liquidity: They have lower liquidity. Selling before maturity may involve market price fluctuations and capital gains tax.
- Tax Slab: Most beneficial for those in higher income tax brackets.
- Availability: New issuances are rare and you can buy from the secondary market.
And that is all you need to know about tax-free bonds and their purchase. Now you can easily make a purchase if you want to at any point in time.
