If you are looking for a haven to park your funds in, here’s good news for you: Invest in tax free bonds and earn interest on your funds every year. There’s more good news; the interest earned on your bond is entirely tax-free.
The security of tax free bonds in India is issued by a company, financial institution or the government. These bonds are, therefore a safe investment option.
You can sell the bonds before maturity, too, on market price as they are listed on the Bombay and National Stock Exchanges.

Features of tax free bonds

These bonds have unique characteristics.

  1. Interest: The interest on these bonds is earned annually, and the Central government determines it. All interest earned is exempt from taxation.
  2. Tenure: Tax free government bonds usually come as long-term investment tools. You can invest in these bonds for up to 10, 15 or 20 years, depending on your needs.
  3. Liquidity: You can trade these bonds at any time as per the ongoing market rate. However, any profit from the sale of these bonds will be taxed under the IT Act.
  4. Form: You can hold these bonds in physical or dematerialised bonds. So you may choose to purchase using your demat account or purchase directly.

Benefits of tax free government bonds

The advantages of tax-free go beyond the fact that these bonds give you tax-exempt interest. Here’s why you should invest in tax free government bonds:

  1. Assured income: The interest you earn on these bonds is assured every year. You stand to earn tax-free income every year, apart from the principal that will be returned to you on maturity. Only Indian nationals and Hindu Unified Family are allowed to purchase these bonds.
  2. Safety: These bonds are backed by the government of India, which means the likelihood of default is low. Even if a company you bought bonds from goes bankrupt, its assets will be liquidated. As bondholders, you will get your investments back.
  3. Easy trade: The tax free bonds are listed on the stock market. So you can sell your bonds on the market price when the prices appreciate. You stand to benefit in any market appreciation.
  4. Higher profit for higher tax bracket: These bonds are an ideal investment option for high net worth individuals. So if you fall in the 30 percent or above tax bracket, you stand to gain more. Additionally there is no upper limit to investment in these bonds.

Conclusion (CTA):

Tax free bonds are a good option for anyone looking for a fixed tax free income from investments. If you are looking at fixed deposits and corporate bonds as an investment option, you should also consider tax free government bonds as an option. It is a safe option to fall back to without having to worry about liquidity.

FAQs - Frequently Asked Questions
Are GOI bonds safe?
GOI bonds are ideal for investors with zero risk-tolerance, senior citizens, or someone who wants to build wealth for a specific purpose like financing retirement or children’s education. Since the government of India backs these bonds, chances of default are minimum, or to say these are the safest investment instrument that you can find in the market.

Apart from generating income, these instruments are also favoured for saving taxes. When it comes to tax saving, GOI bonds are two types – tax-free bonds and tax saving bonds. Tax saving bonds offer tax saving under section 80CCF of Income Tax Act of India.
Who can invest in GOI Bonds?
Resident Indians, non-resident Indians, and Hindu Undivided Family (HUFs) can apply for these bonds. Resident and non-resident Indians can apply for GOI bonds in an individual capacity or individual capacity in joint basis or on behalf of minor children.

Online application facility for GOI bonds is available only to resident Indians applying in an individual capacity. Interested non-resident and HUFs must apply offline.
Are GOI bonds tax-free?
GOI bonds are exempted from tax as per section 10 of Income Tax Act, 1961. These bonds are especially attractive to investors with zero risk-tolerance and senior citizens who want a steady income from their investment. The maturity amount is guaranteed. Moreover, these savings bonds are attractive to investors falling in a high-income tax bracket. Interest earned on these bonds is exempted from wealth tax as well tax deducted at source (TDS), which apply to other investment instruments.

However, before investing in government savings bonds keep in mind that these bonds have longer maturity period, usually five to 40 years, and are low in liquidity, meaning these bonds can’t be traded frequently like stocks.
How do I buy a GOI bond?
If you are an Indian citizen, you can apply online. These bonds are issued by RBI and distributed over the counter by approved banks. To subscribe for GOI savings bonds, you would need to submit a ‘revised for A’ form either physically or online. The digitised version of the bond will get credited to your Bond Ledger Account. You will receive a Certificate of Holding as proof of the investment.

Or else, you can also apply through NSE goBID app.
Which government bonds are the best to buy?
Government savings bonds are long term investment instruments with assured return on maturity. They are of following types.

  • Fixed-rate bonds: The interest rate on the bond remains fixed for the entire tenure of the investment, like the 7% GOI 2021 bonds.

  • Floating rate bonds: The interest rate of these bonds periodically change which will be announced in advance, like a floating bond can have a pre-announced interval of six months, which means that in every six months the interest rate of the bond will be adjusted.

  • Sovereign Gold Bonds (SGBs): The price of a gold bond is calculated on the simple average of the closing price of gold of 9.999 percent purity for three working days before the issuance of the bond.

  • Inflation-indexed bonds: Only retail investors can apply for these bonds. The payable interest on these bonds has two components, fixed rate of interest and inflation rate.

  • 7.75 percent government Savings Bonds: The 7.75 per cent GOI savings bonds were declared in 2018, replaced the 8 percent GOI bonds. The interest you will earn on these bonds is 7.75 percent.

  • Bonds With Call and Put Options: The unique feature of these bonds implies that the issuer can buy back (call) these bonds and the investor can exercise his rights to sell (put).

  • Zero-coupon bonds: These GOI savings bonds don’t pay any interest. Earning arising from these bonds is the difference between issuance price and redemption rate.

  • You can select bonds as per your financial goals.
    Is interest in GOI bonds taxable?
    There are both taxable and tax-free types. For example, 7.75 percent saving bonds are one of GOI taxable bonds. Depending on your tax situation, one kind of bond will suit your needs. To decide, calculate the taxable equivalent yield on taxable bonds – it is the after-tax amount of income that you should get from a taxable bond to match the income earned from tax-free bonds.

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