No new tax-free bonds issued since 2016. Here's how to tap existing ones for tax-free income

Time of India

13-05-2025

Tax-free bonds, a unique fixed income instrument, offer
investors
the advantage of earning interest income without the burden of taxation.
Nikhil Aggarwal
, Founder & Group CEO of Grip Invest, in an interaction with ETMarkets, emphasized that
tax-free bonds
became popular as they allow individuals, particularly those in higher tax brackets, to generate better
post-tax returns
.
Tax-free bonds, which were initially issued by public sector undertakings (
PSUs
) under government directives, gained traction as they provided investors with secure, government-backed returns without any tax liability.
Sponsored Links
Sponsored Links
Promoted Links
Promoted Links
You May Like
Learn How Smart Traders Use Data to Navigate Volatile Markets
Trader Headline
Learn More
Undo
"These came to be known as or are known as tax-free bonds because the interest is tax-free in the hands of the investor," he said, underscoring the appeal of these bonds for those seeking tax-efficient investments.
Bonds Corner
Powered By
No new tax-free bonds issued since 2016. Here's how to tap existing ones for tax-free income
Tax-free bonds, last issued in 2016 by PSUs, remain attractive due to their post-tax returns exceeding those of fixed deposits. Investors can access these AAA-rated bonds through wealth managers, stock market platforms, or online bond platforms. With interest rates ranging from 5.5% to 6% tax-free, these bonds offer liquidity and potential capital gains in a declining interest rate environment.
Foreign banks dump $3 billion worth g-secs amid India-Pak tensions
Is a US recession imminent and what would be the impact on India? How should we manage a robust portfolio in this scenario?
Will NaBFID successfully navigate offshore bond market?
Indian bond yields snap 7-week falling streak due to border conflict
Browse all Bonds News with
The last issuance was in 2016, and since then, no new tax-free bonds have been issued. However, Aggarwal pointed out that the existing supply remains robust, allowing investors to still participate in these instruments.
"When they were done last in 2016, they were issued in large volumes and hence, there is sufficient supply in the market," he stated.
Live Events
Why tax-free bonds?
One of the key advantages of tax-free bonds, as Aggarwal highlighted, is the favorable post-tax returns. While the interest rates on these bonds range from 5.5% to 6% tax-free, they are comparatively more attractive than
fixed deposits
(FDs) on a post-tax basis.
For instance, a 6% FD return is taxable, reducing the effective yield to around 4.2% to 4.5% for those in the 30% tax bracket. "Tax-free bond today is actually a far better investment option than an FD from a pure returns perspective," Aggarwal emphasized, noting the significant post-tax advantage.
In terms of liquidity, tax-free bonds also stand out as they can be easily traded in the secondary market without penalties. "In the case of a tax-free bond, they are actually super liquid," Aggarwal said, adding that investors can exit these bonds before maturity without facing a penalty, unlike FDs, which often impose a premature withdrawal charge.
Also read:
Is a US recession imminent and what would be the impact on India? How should we manage a robust portfolio in this scenario?
Aggarwal also noted that in the current interest rate environment, where the Reserve Bank of India (RBI) has already implemented two rate cuts and is expected to lower rates further, tax-free bonds present an additional advantage of potential capital gains. "Investors purchasing tax-free bonds today will not only see interest but could see some capital appreciation as yields compress," he said.
While new issuances of tax-free bonds have been halted, the possibility of reintroducing them remains uncertain. Aggarwal indicated that from the government's perspective, issuing tax-free bonds involves a trade-off as it leads to a loss in tax revenue.
However, he suggested that the government could consider offering new tax-free bonds even at a lower interest rate, given their continued attractiveness as a risk-free investment option.
Who issues tax-free bonds?
Tax-free bonds, typically issued by government-backed entities such as NHAI, Rural Electrification Corporation, and others, carry AAA ratings, making them a low-risk investment option. "They do not typically see defaults. These are bodies like NHAI,
Rural Electrification Corporation
of India, and the likes. So, they are AAA rated, very secure instruments," said Aggarwal, drawing attention to their stability and security.
How to invest in tax-free bonds?
Despite no new issuances,
retail investors
can still access tax-free bonds through three primary routes. First, they can reach out to their wealth managers or bank relationship managers, who may have access to these bonds.
Second, they can directly purchase these bonds through stock market platforms like Groww, Zerodha, or other brokerage apps. "You can actually try to buy these bonds directly in the stock market. Just open your Groww, Zerodha, whatever app you use and actually put in a request," said Aggarwal.
The third option is through Online Bond Platforms (OBPP), where such bonds are periodically offered based on investor demand.
For retirees and those seeking passive income, tax-free bonds can be particularly appealing due to their relatively higher coupon rates. Aggarwal explained, "The coupon on these bonds is in the range of 8% to 9%, making the interest payout quite healthy and interesting for someone looking for passive income." He provided a practical illustration: a Rs 10 lakh investment in a tax-free bond with a 9% coupon rate would yield approximately Rs 8,000 per month as interest income.
Also read:
Will NaBFID successfully navigate offshore bond market?
For retail investors looking to enter the tax-free bond market, Aggarwal recommended exploring existing bonds from entities like NHAI and REC, readily available on brokerage platforms. With a minimum investment size of Rs 1,000, these bonds are accessible to a broad range of investors, offering a compelling combination of tax-free income, security, and liquidity.
(
Disclaimer
: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)