Tax Free Bonds India (3 Listed)

Tax-free bonds in India are issued by government-backed entities such as public sector undertakings (PSUs) or infrastructure companies. These bonds offer investors regular interest payments, which are exempt from income tax under the Income Tax Act. They typically have long maturity periods, ranging from 10 to 20 years, providing investors with stable returns over time. Tax-free bonds are considered low-risk investments due to the backing of government entities and the tax benefits they offer, making them attractive to investors seeking tax-efficient fixed-income options.

Tax Free Bonds India

Tax-free bonds in India are fixed-income securities issued by government-backed entities like public sector undertakings (PSUs) or infrastructure companies. These bonds offer investors a steady stream of income through regular interest payments, which are exempt from income tax under the Income Tax Act. This tax exemption makes tax-free bonds an attractive investment option for individuals in higher tax brackets looking to generate tax-efficient returns.

One of the key features of tax-free bonds is their long maturity period, typically ranging from 10 to 20 years. This longer duration allows investors to lock in their investments for an extended period and enjoy stable returns over time. Additionally, tax-free bonds are considered relatively low-risk investments due to the backing of government entities, which enhances their creditworthiness.

Investing in tax-free bonds can provide diversification to an investor’s portfolio, especially for those seeking fixed-income investments with tax benefits. However, it’s essential to consider factors such as interest rate risk and liquidity before investing in tax-free bonds. Overall, tax-free bonds serve as a viable option for investors looking to earn tax-free income while preserving capital over the long term in the Indian financial market.

Are There Any Tax-Free Bonds in India?

While technically there are no new tax-free bonds issued by the Indian government since 2016, existing tax-free bonds still exist and can be traded on the secondary market. This means you can still potentially invest in and benefit from their tax-free interest payouts. Here’s what you need to know:

Existing Tax-Free Bonds

  • Issued by Government entities, PSU-backed companies, infrastructure companies, etc.
  • Interest- Exempt from income tax under Section 10(15) of the Income Tax Act, 1961.
  • Maturity- Typically ranges from 10-20 years.
  • Interest Rates- Currently, they offer rates between 5.03% and 7.62%.

Things to Consider

  • Liquidity- These bonds are less liquid than other options like shares, meaning selling them before maturity might be difficult.
  • Capital Gains- Any profit you make from selling the bond before maturity is taxable.
  • Suitability- They are more beneficial for investors in higher tax brackets as the tax exemption becomes more valuable.

Where to Find Them

  • Secondary Market- Platforms like IndiaBonds, NSE Bonds, and BSE Bonds allow buying and selling existing tax-free bonds.
  • Depositories- You can hold these bonds in your demat account after purchase.

What Is the Lock in Period of Tax-Free Bonds?

Tax-free bonds typically do not have a lock-in period. Investors can buy and sell tax-free bonds in the secondary market at their convenience, subject to market liquidity and prevailing prices. Since tax-free bonds are traded on stock exchanges, investors have the flexibility to exit their investments at any time without any mandatory holding period. However, it’s essential to consider market conditions and potential liquidity before buying or selling tax-free bonds in the secondary market.

Which Is the Best Platform To Buy Bonds in India?

In India, there are several platforms where investors can buy bonds, each offering its own set of features and advantages. Some of the popular platforms for buying bonds in India include:

  1. Stock Brokers- Many full-service and discount stock brokerage firms offer online platforms for buying and selling bonds. These platforms provide access to a wide range of bonds, including government bonds, corporate bonds, and tax-free bonds.
  2. Banks and Financial Institutions- Several banks and financial institutions in India offer online platforms or services for buying bonds. Investors can explore the bond offerings available through their bank’s investment platform or directly through the bank’s website.
  3. Mutual Fund Platforms- Some mutual fund platforms allow investors to invest in bond funds, which primarily invest in a portfolio of bonds. Investors can buy bond funds through these platforms, which offer convenience and professional management of bond investments.
  4. Government Securities Market- The Reserve Bank of India (RBI) operates the NDS-OM (Negotiated Dealing System – Order Matching) platform for trading in government securities, including government bonds. Institutional investors and eligible entities can access this platform for buying and selling government bonds.
  5. Bond Marketplaces- There are online bond marketplaces and platforms in India where investors can buy and sell bonds directly from issuers or other investors. These platforms may offer a variety of bonds, including corporate bonds, government bonds, and municipal bonds.

Before selecting a platform to buy bonds, investors should consider factors such as fees and commissions, available bond offerings, ease of use, customer support, and security features. It’s also advisable to research and compare different platforms to find the one that best suits your investment needs and preferences.

What Is the Highest Interest Rate on Tax-Free Bonds?

As of my last update in January 2022, the interest rates on tax-free bonds in India varied depending on the issuing entity and prevailing market conditions. In the past, some tax-free bonds offered interest rates in the range of 7% to 8% per annum. However, it’s important to note that interest rates on tax-free bonds are subject to change and may vary based on factors such as the issuer’s credit rating, market demand, and prevailing interest rate environment. Investors interested in tax-free bonds should research the current offerings and consult with financial professionals for the latest information on interest rates and available options.

What Is the Difference Between Tax-Free and Taxable Bonds?

The main difference between tax-free and taxable bonds lies in how their interest income is treated for taxation purposes

Tax-Free Bonds

1). Interest income earned from tax-free bonds is exempt from income tax under the Income Tax Act.

2). Investors do not have to pay taxes on the interest they receive from holding tax-free bonds, regardless of their income tax bracket.

3). Tax-free bonds are typically issued by government-backed entities and may have longer maturity periods.

Taxable Bonds

1). Interest income earned from taxable bonds is subject to taxation as per the investor’s income tax slab.

2). Investors need to pay taxes on the interest they receive from holding taxable bonds, which are taxed at the applicable income tax rates.

3). Taxable bonds can be issued by both government and private entities and may offer higher interest rates compared to tax-free bonds to compensate for the tax liability.

Overall, the key distinction between tax-free and taxable bonds is the tax treatment of the interest income they generate. Tax-free bonds provide investors with tax-free income, while taxable bonds require investors to pay taxes on the interest income they receive. Investors should consider their tax situation, investment goals, and risk tolerance when choosing between tax-free and taxable bonds.

Are Government Bonds Safe?

Government bonds are generally considered safe investments due to the backing of the government issuing them. Here are some reasons why government bonds are considered safe.

  1. Sovereign Guarantee- Government bonds are backed by the full faith and credit of the issuing government, assuring repayment of principal and interest.
  2. Low Default Risk- Governments can raise funds through taxation and have access to central banks, reducing the likelihood of default on their debt obligations.
  3. Stable Income- Government bonds typically offer fixed or predictable interest payments, providing investors with a stable source of income.
  4. Liquidity- Government bonds are highly liquid securities, meaning they can be easily bought and sold in the secondary market, enhancing their marketability and reducing the risk of being unable to sell when needed.
  5. Credit Ratings- Government bonds are often assigned high credit ratings by credit rating agencies, reflecting their low credit risk and increasing investor confidence.

While government bonds are generally considered safe, investors need to consider factors such as inflation, interest rate fluctuations, and geopolitical risks that can affect bond prices and returns. Additionally, different types of government bonds may carry varying levels of risk, so investors should conduct thorough research and diversify their portfolios accordingly.


The bottom line is that tax-free bonds in India offer investors an opportunity to earn regular income through interest payments that are exempt from income tax. These bonds are typically issued by government-backed entities and provide a relatively safe investment option with predictable returns over the long term. However, investors should carefully consider factors such as interest rate risk, liquidity, and their tax situation before investing in tax-free bonds.

Also Read:

Sovereign Gold Bond in Hindi

Sovereign Gold Bond Lock-in Period

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