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Important Facts For Prelims

Tax-free Bonds

  • 10 Jun 2019
  • 2 min read
  • As the name suggests, interest earned from tax-free bonds is exempt from tax.
  • In simple terms, irrespective of the income slab one need not pay any income tax on the interest income. Some of the public undertakings which raise funds through the issue of tax-free bonds are IRFC, PFC, NHAI, HUDCO, REC, NTPC, and Indian Renewable Energy Development Agency.
  • The tenure of the bonds is usually 10/15 or even 20 years. They are also listed on stock exchanges to offer an exit route to investors.
  • The bonds are tax-free, secured, redeemable and non-convertible in nature.

Note: A bond is a fixed income instrument carrying a coupon rate of interest and is issued for a fixed tenure.

Trading tax-free bonds

  • Such bonds are also listed on stock exchanges and traded only through demat accounts. If there is any capital gain on transferring them on exchanges, that will be taxed.
  • If the holding period is less than 12 months, capital gains on sale of tax-free bonds on stock exchanges are taxed as per the tax rate of the investor.
  • Qualified Institutional Investors defined by SEBI under the Disclosure and Investor Protection Guidelines can invest in these bonds.
    • Partnership companies & limited liability groups are also eligible. Entities like trusts, co-operative & regional banks and corporate companies too are regular investors in tax-free bonds.
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