Source: http://profit.ndtv.com/news/cheat-sheet/article-tax-free-bonds-10-facts-you-need-to-know-before-investing-370573
Here are the salient features of the tax-free bonds:
Here are the salient features of the tax-free bonds:
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What are tax-free bonds: These bonds are mostly issued by government
enterprises and pay a fixed coupon rate (interest rate). As the proceeds
from the bonds are invested in infrastructure projects, they have a
long-term maturity of typically 10, 15 or 20 years.
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Tax benefits: The income by way of interest on tax-free bonds is fully
exempted from income tax. The interest earned from these bonds does not
form part of your total income. There is no deduction of tax at source
(TDS) from the interest, which accrues to the bondholders. But remember
that no tax deduction will be available for the invested amount.
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Interest rate: The coupon (interest) rates of tax-free bonds are
linked to the prevailing rates of government securities. So these bonds
become attractive when the interest rates in the financial system are
high.
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Interest payment: The interest on these bonds is paid annually and credited directly in the bank account of the investor.
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Tax free bonds vs bank fixed deposits (FDs): The interest earned on
bank FDs and other normal bonds are added to the income of the investor
and taxed as per the income-tax slabs. As interest earned from tax-free
bonds are not taxed, investors in higher tax brackets mostly earn a
better post-tax return than from FDs. But remember, the bank FDs score
over tax-free bonds in terms of liquidity as these bonds have a longer
maturity tenure.
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Credit risk: Since tax-free bonds are mostly issued by
government-backed companies, the credit risk or risk of non-repayment is
very low.
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Liquidity: The tax-free bonds get listed and then traded on the stock
exchange(s) to offer an exit route to investors. But these bonds might
not enjoy high liquidity as they are long-term in nature.
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Do you need a demat account? The bonds could be issued both in demat and physical mode.
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Secondary market: Investors can buy and sell these tax free bonds on
the stock exchanges. Though the interest earned on these bonds is
tax-free, any capital gain from sale in the secondary market is taxable.
Short-term capital gains from sale of tax-free bonds on exchanges are
taxed at the normal rate, while long-term capital gains are taxed at 10%
without indexation and 20% with indexation, whichever is lower. By
indexing, you adjust the purchasing price with annual inflation.
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Who should invest? Tax-free bonds are suitable for investors looking
for a steady source of income annually and can afford to lock-in their
capital for the long term.
(Disclaimer: Investors are advised to make their own assessment before acting on the information.)
