Know All About Tax Saving Bonds

By Author: Maithili Pawar
Total Articles: 31
Comment this article

People are still right after the investment options that offer good returns. Among other advantages, zero tax on dividends makes tax-free bonds one of the most sought-after investments on the market.

What are Tax-Free Bonds?

A government-owned corporation issues tax-free bonds to collect funds for a specific reason. The municipal bonds are an example of such bonds. They deliver a fixed interest rate and is, therefore, an investment avenue at low risk. As the name implies, its most striking feature is its complete tax exemption as per Section 10 of the Income Tax Act of India, 1961.
Tax free bonds usually have a long-term maturity of ten years or more. The Government invests in infrastructure and housing the money raised from these bonds.

Who should invest in tax-free bonds?

Tax-free bonds are an ideal option for investors and senior citizens looking for a fixed income. As government entities usually issue these bonds for a longer-term, the default risk in these bonds is much lower, and you are assured of a more prolonged period of fixed income, generally ten years or more. Government agencies invest the raised money in infrastructure and housing projects through the issuance of those bonds.

For investors falling inside the highest tax bracket, tax-free bonds are the ideal option. Usually, high net worth (HNI) individuals, members of the HUF, trusts, cooperative banks and eligible institutional investors tend to invest in tax saving bonds.

Features of tax saving bonds

• Risk factors: There are very small risks of defaulting on interest payment because these schemes come from the Government itself. This also provides capital protection and a monthly or annual fixed income. Therefore, it can be considered secure.

• Tax- exemption: The interest paid in tax-free bonds is fully tax-exempt. Also, the tax deducted at source (TDS) does not apply to these bonds. However, it is recommended to state your interest income as tax-free bonds do not indicate that you can claim the investment amount for the tax deduction. Tax-free bonds India provide tremendous benefits for investors who fall into the highest tax brackets as compared to bank FDs.

• Liquidity: You cannot liquidate tax-free bonds as fast as, say, debt funds. Since government bonds are long-term investments and have more prolonged lock-in periods, liquidation of the bonds may not be that relaxed.

• Lock-in period: Tax saving bonds have longer lock-in-period that range from 10 to 20 years. You cannot withdraw funds before the maturity date. Therefore, please ensure that you will not require this money immediately after investing.

Author Bio: Maithili Pawar is a financial expert with 5 years of experience in the investment banking field. In her free time, she writes on trading topics. In this, she has given an overview of tax saving bonds