What they are
Between 2011 and 2016, public sector companies such as NHAI, REC, PFC, IRFC, HUDCO and NHB were allowed to raise money through tax-free bonds of 10, 15 and 20 years. The interest is fully exempt from income tax, and it is paid every year until maturity.
No new issues have come since 2015-16, so today you can only buy them from other investors on the stock exchange.
Why the yield is lower than the coupon
Because the coupons were set when rates were higher and the interest is tax-free, these bonds usually trade above their face value. If a bond with a 7.5% coupon costs 10% above face value, your yield to maturity is lower than 7.5%. Check the YTM on the exchange or your broker's screen before buying.
Who they suit
They suit people in the highest tax slabs who want steady yearly income and can hold to maturity. For someone in the 30% slab (31.2% with cess), a 5.5% tax-free yield is worth about the same as 8% of taxable interest — compare that with a fixed deposit or a government bond.
Points to watch
- Liquidity: many series trade thinly. Use limit orders, not market orders.
- Capital gains are taxable: only the interest is exempt. A gain on sale after 12 months is taxed at 12.5%.
- Maturity: the earliest series are already maturing; pick one whose maturity matches your plan.
- Interest goes to whoever holds the bond on the record date.
For general information only, not investment advice or a recommendation. Oxon Fintech is a loan facilitation platform, not a SEBI-registered investment adviser, bank or mutual fund distributor, and does not sell bonds, deposits or funds. Rates and rules are as checked on the date above; confirm with the issuer, bank or fund house before investing. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.