A bond is a debt security, in which the authorised issuer – company, financial institution, or Government, offers regular or fixed payment of interest in return for the money borrowed by the said issuer. It is for a certain period of time.

What is a tax-free bond?

• Security issued by a company, financial institution or the government
  Offers regular or fixed payment of interest in return for borrowed money for a specified period

Why are these bonds called “tax-free”?

• You don’t have to pay any tax on the interest earned from these bonds (Income Tax Act, 1961)

Why are these bonds called “tax-free”?

• You don’t have to pay any tax on the interest earned from these bonds (Income Tax Act, 1961)

How do tax-free bonds work?

• Tenure: You can invest for up to 10, 15, or 20 years – it’s your choice.
• Liquidity: You can easily sell your bonds any time before maturity.
• Safe investment option: You can be sure of receiving the promised regular interest.
• Tax-exempted: You are not required to pay any taxes on the interest you earn.
• Demat account is optional: You can hold these bonds in physical form, too.

Salient Features:

Eligibility for Investment

The Bonds may be held by:

An individual, not being a Non-Resident Indian (NRI)

(a) in his or her individual capacity, or
(b) in an individual capacity on joint basis, or
(c) in an individual capacity on anyone or survivor basis, or
(d) on behalf of a minor as father/mother/legal guardian

Limit of Investment

(a) There is no maximum limit for investment in the Bonds.

Interest

(i) The bond will be issued in cumulative and non-cumulative form, at the option of the investor.
(ii) The Bond will bear such interest as specified in the offer documents/forms. Interest on non-cumulative bonds will be payable at half-yearly intervals from the date of issue. Interest on cumulative bonds will be compounded with half-yearly rests and will be payable on maturity along with the principal. Interest to the holders opting for non-cumulative Bonds will be paid from date of issue upto 31st July/31st January, as the case may be and thereafter at half-yearly for period ending 31st July/31st January on 1st August and 1st February. Interest on Bond in the form of “Bond Ledger Account” will be paid, by cheque/warrant or through ECS by credit to bank account of the holder as per the option exercised by the investor/holder.

There are instruments like capital gain bonds, in which the profit arising from the sale of a property can be invested. These have a lock-in period of three years and the maximum limit for investing in such instruments is Rs 50 lakhs”, says Badal. These bonds are currently being issued by NHAI and REC.