Best Tax Free Bonds to Invest in India

Best Tax Free Bonds to Invest in India

Tax Free Bonds India - Nomad Entrepreneur

One of the hugely popular investment options, especially among high net worth investors, is tax-free bonds. Tax-free bonds, as the name suggests, are the interest earned from tax-free bonds in India that are exempted from tax. In simple terms, irrespective of the income slab one need not pay any income tax on the interest income. There is zero tax chargeable on these bonds. These are issued by the government, and hence, are less risky. They offer a fixed rate of interest which is non-taxable. These interest payments are usually on an annual basis. One thing to keep in mind about tax free bonds in India is that interest income earned is exempted from tax. But any capital gains from the sale in the secondary market are taxable. Some of the public undertakings which raise funds through the issue of tax-free bonds in India are IRFC, PFC, NHAI, HUDCO, REC, NTPC, and Indian Renewable Energy Development Agency.

Top 5 Tax-Free Bonds in India

  1. NHAI tax free bond

These bonds are issued by the National Highway Authority of India. It is a Ministry of Road Transport and Highways nodal agency which has its headquarters in New Delhi. Its bond has received an AAA rating from India’s top credit rating agencies, including Crisil, CARE, and Brickwork. Currently, the interest rate paid by this bond is 8.75%. At the same time, it has a YTM of 4.71%.

Benefits of investing in NHAI Tax-Free bonds

  • Tax-Free Income: Interest Income from these bonds is completely tax-free and would be payable annually
  • Investment safety: These bonds are rated ‘AAA’ denoting the highest degree of safety regarding timely servicing of financial obligations
  • Liquidity: These bonds will be listed on both BSE & NSE and hence provide liquidity for bondholders.
  • Holding Pattern: You could hold these bonds in both Demat as well as in Physical form. Customers who do not hold any Demat account can also apply for this bond.
  1. NABARD Tax-free bonds

NABARD issued its tax-free bonds for Rs.5,000 crore with tenures of 10, 15, and 20 years, in March 2016. The bonds were given the rating of ‘CRISIL AAA/Stable’ by the Credit Rating Information Services Of India Limited (CRISIL) and the grade of ‘IND AAA/Stable by India Ratings. This means that the bonds received the highest rating in terms of safety and the institutions’ ability to service their financial obligations. The bonds carry low credit risk.

Benefits of investing in NABARD tax free bonds

  • Backed by the Government of India, NABARD bonds are a safe option to invest in.
  • The NABARD tax-free bonds are proposed to be listed on the BSE. This will provide holders with more liquidity.
  • The interest income from this bond is tax-free and is payable annually.
  • Investors who do not have a Demat account need not worry as these bonds can be held in physical form also.
  • The NABARD tax-free bonds have an ‘AAA’ rating.
  • As is indicative of the name, the bonds are tax-exempt as per the Income Tax Act, 1961
  • There is scope for capital appreciation with falling interest rates
  • These give you the option of selling in the secondary market if you wish to exit as they are listed on the NSE/BSE.
  1. PFC Tax free bonds

Power Finance Corporation is a publicly listed government company that provides a complete range of financial products and related consulting services (from project conception to post-commissioning) to clients in the power sector. Because it concentrates on the power sector, it receives substantial financial aid. The PFC’s tax-free debt instruments provide around an 8.92% interest rate to the investors. The YTM is around 4.86%. Both Crisil and ICRA have assigned AAA ratings to these debt instruments. The bonds have been rated ‘CRISIL AAA/Stable by CRISIL, ‘[ICRA] AAA’ by ICRA, and ‘CARE AAA’ by CARE.

Benefits of investing in PFC tax free bonds

  • Interest Income from this bond is tax free.
  • These bonds are Secured and are AAA rated.
  • These can be held in both the forms – in demat as well as physical. i.e customers who do not hold any demat can also apply and get tax-free income.
  • The bonds will be listed on BSE. Customers who wish to exit from these bonds before maturity can do so by selling these bonds in the secondary market at prevailing market prices.
  1. IIFCL Tax free bonds

IIFCL is a wholly-owned ‘Government company’, incorporated under the Companies Act in January 2006, according to the Scheme for Financing Viable Infrastructure Projects (“SIFTI”), notified by the Ministry of Finance. Commenced operations in April 2006 and was notified as a public financial institution u/s 4A of the Companies Act in January 2009. Provides financial assistance to long-term infrastructure projects in the sectors as per the Harmonized List. Also provides refinance for loans sanctioned by banks and other eligible institutions, by the eligibility criteria set out in the refinance scheme. The interest rate offered on IIFCL tax-free bonds is 8.91%. At the same time, the YTM is 5.01%. These bonds are being affirmed with an AAA rating by India Ratings.

Benefits of investing in IIFCL tax free bonds

  • Interest Income from this bond is tax free.
  • These bonds are Secured and are AAA rated.
  • These can be held in both the forms – in demat as well as physical. i.e customers who do not hold any demat can also apply and get tax-free income.
  • The bonds will be listed on BSE. Customers who wish to exit from these bonds before maturity can do so by selling these bonds in the secondary market at prevailing market prices.
  1. HUDCO Tax free bonds

HUDCO is a wholly government-owned entity, providing loans for housing and urban infrastructure projects in India. It has been conferred the status of Miniratna (Category-I public sector enterprise) by the Centre. The company focuses on funding the housing needs of economically weaker sections (EWS) and low-income group categories, along with funding non-commercial urban infrastructure projects. HUDCO issued 32 series of tax-free bonds totally, with varying maturities of 10, 15, and 20 years in FY12, FY13, FY14, and FY16. Many series are actively traded on the BSE and the NSE with relatively higher yield-to-maturity (YTM) and liquidity. According to data compiled by HDFC Securities’ retail research, five series of HUDCO tax-free bonds, with YTM (yield-to-maturity) of 5.4-5.9%, are actively traded on both exchanges.

Benefits of investing in HUDCO tax free bonds

  • They are issued by a handful of PSU companies that are operated and backed by the government of India.
  • These have the highest credit rating possible of AAA. Therefore, they have extremely low credit risk.
  • The yields are less volatile compared to the yields of corporate bonds.
  • They have very high liquidity.

Recommended Read:

  1. 12 good money habits that can make you wealthy
  2. Choose the right one – List of private banks in India explained in detail

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