How beneficial are tax free bonds?

March 16, 2018March 16, 2018 by Gyanwalebaba

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Investing in the market has always been a plan for every individual. However, it becomes difficult because of the availability of numerous plans, the risks associated with it, and the trading procedure. Adding to the situation is the availability of schemes where an individual can invest amount on a monthly basis, quarterly basis, half yearly, and annually. Choosing an appropriate investment, with reduced risk and high returns is the appropriate option. At the same time, individuals also consider whether the return on the investment is taxable or not. As we are speaking about investment, it is here that tax free bonds come into the picture.

Tax free bonds

Tax-free bonds, as the name suggests, do not attract any tax upon maturity. The carry a specific rate of interest and investment period. Irrespective of the income slab under which an individual fall, purchasing tax-free bonds entitles them from tax exemption. In simple terms, one need not pay tax by buying tax-free bonds. Majority of the public undertaking companies issue tax-free bonds to accumulate wealth. The bonds have a maturity period of 10, 15, and 20 years. However, because these public-undertaking companies list these bonds on the stock exchange, it is possible for investors to find an easy exit much before the completion of the actual tenure.

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Tax exempt

Under the income tax act, section 10, users investing in tax-free bonds do not have to pay a single penny towards tax. However, there is no tax exemption on the invested amount made by the investor. Additionally, tax deduction at source is not applicable to the accumulated interest.

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As companies list the bonds on the stock exchange, it is possible for investors to trade using demat accounts. While performing trading of the tax-free bonds, and the individual who is gaining capital gain will have to pay tax to the government. Also, if the person is holding the bond for less than any year, he/she will be paying tax. Tax is also applicable for those who are keeping it for a year and selling the bonds. In such cases, the seller will be paying 10.3 % on the capital gains. Banks like onlinesbi, netpnb or Allahbad Bank provide you with special tax handlance on large scale investments too.

The benefit

The benefit of choosing tax-free bonds is useful for high net worth investors. It provides them the possibility to park huge sums. Additionally, as they are safe and issued by government undertaking companies, they carry high investment ratings. Apart from it, the bonds fall under low-risk category and provide the opportunity for the high net worth investors to enjoy benefits for the entire tenure. Apart from earning considerable amounts in the form of capital gains at the end of the maturity, tax free bonds also provide safety of the capital without any tax deduction.

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Eligibility

Although every individual possesses the possibility to buy a tax-free bond, it may not be suitable because of the tenure. Therefore, it is preferable for the high-income group and those looking at investing huge sums.

Conclusion

Although tax-free bonds are beneficial, investing in them requires careful thought. As the name suggests, investing in them provides tax exemption. It is useful for those who are looking to accumulate wealth to meet long-term goals such as children’s education or retirement. Before investing, it will be helpful in evaluating the tax rate, tax liability and the long-term goals.

Tax free bonds

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