What are Tax Exempt or Tax Free Bonds issued in India? Who should invest in it and Why?
Tax Free or Tax Exempt Bonds are very attractive investment option for Individuals falling in highest tax bracket. Interest earned on these tax free bonds are fully exempt under section 10(15)(iv)(h) and hence not included in total taxable income. However, investment in Tax Free Bonds does not qualify for deduction under section 80C. So to put it more clearly we can say Tax Free Bonds are a secure way of parking your surplus funds to earn a tax free income, which otherwise many people keep in Fixed Deposits with banks.
Who should invest in Tax Free Bonds?
Tax Free Bonds are good investment option for people who are in 20% and 30% tax bracket. When we invest surplus funds in Fixed Deposit, interest earned on the same is subject to Income Tax liability. However, interest earned from Tax Free Bonds is fully exempt.
To understand more clearly, lets try with an example-for a person falling in 30% tax bracket, if FD earns annual interest of 8%, net return available after tax will be 5.6% only i.e. 8%-2.4% (income tax payment of 2.4% i.e. 30% of 8%)). However, if Tax Free Bonds earn 8% return, there will not be any tax liability and effective rate of return will be 8% only.
Risk associated with Tax Free Bonds:
How to Invest in Tax Free Bonds?
Tax Free Bonds can be subscribed at the time of initial offering by the PSU. Later-on these bonds can be purchased through Stock Exchanges. For purchasing through stock exchange you need to have an account with any Stock Broker.
Tax Free Bonds are very good
investment option for those
falling under maximum tax bracket of 30%. Tax Free Bonds will yield
return on post tax basis (7.5-8.5%) when compared to Fixed Deposit
|content and images copyright @tdsmaster.com, 2011-2020|