How to invest in tax free bonds and investing factors
Tax free bonds are considered as one the best investments die to its tax benefit. Tax free bonds are debt instruments issued for raising money from the public. They offer a fixed rate of interest. These bonds are considered as less risky because of governments involvement in it. These can be traded in stock exchange.
Under sec 10 of the income tax act, interest income from tax free bonds is exempted.
Lock in period: -
Tax free bonds mostly come up with a lock-in period of 10-20 years. It means they cannot be redeemed before such period. However, they be sold and purchased in stock exchange.
How to invest
CG may authorize certain institution to issue tax fee bonds. When issued the investor can apply either in DEMAT mode or through physical mode, attaching required documents along with.
Who can invest in Tax free bonds?
The following categories of people can invest in a tax-free bond.
• Individual retail investors.
• High net-worth individual investors (who can invest upto 10lakhs)
• Qualified institutional buyers (defined in SEBI act)
• Corporates, trusts, LLP’s and other entities.
Advantages of Tax free bonds: -
1. Interest income is tax free.
2. Risk of non-redemption is less.
3. Since these can be traded on stock exchange, it acts as a highly liquid instrument.
4. Risk of non-payment of interest is very low, since most of them are issued by government enterprises.
5. These provide a fixed return for longer period.
6. One can get a relatively higher amount of interest when compared to market rates.
Factors to be considered before investing in tax free bonds: -
1. Credit ratings: -
Third party credit rating agencies like CRISIL, ICRA assesses the entity issuing such bonds and gives ratings as AAA, AA, AA+ etc. Always buy the bonds with having good ratings.
2. Interest rate: -
A fixed rate of interest is paid periodically by the entities. Always select bonds having higher amount of interest rate. (obviously, everyone wants a higher return to the investment).
3. Frequency of payments: -
It is always better to have a higher frequency of payments. More the frequency better the bond.
Will capital gain tax attracts when sold earlier?
Yes, when you trade investments in the stock exchange and derive income, capital gain tax will be attracted.
Tax free bonds are a good investment option when compared to all other tax saving investments. However, longer lock-in period is one of the limitation but it is better if you have surplus amounts of money.
Even though Tax free bonds can be traded on stock exchange finding a buyer is little difficult. So always consider your financial needs in near future before investing in heavy amounts.