List of Tax-Free Bonds in India in 2025

What Are Tax-Free Bonds?

Tax-free bonds are a type of investment where you lend money to government organisations. These organisations use the money to build things like roads, bridges, and schools. The special thing about these bonds is that the money you earn from them is not taxed by the government.

Here's an example:

Imagine you invest 10,00,000 rupees in a tax-free bond. This bond pays you 7.5% interest every year. You will receive 75,000 rupees each year, and you will not have to pay any taxes on this money. If you were to invest in a regular bond that is taxed, you would need to earn a higher interest rate (around 10.7%) to make the same amount of money after taxes.

List of Tax-Free Bonds in India for 2025

Key Features of Tax-Free Bonds

• Who issues them: Government organisations like the National Highways Authority of India (NHAI) and the Power Finance Corporation (PFC) create and sell tax-free bonds.
• Interest Rates: he interest rates on these bonds are set when they are first sold and stay the same throughout the life of the bond. These rates are usually between 6% and 8%. Even though they might be lower than some other types of bonds, the fact that you don't pay taxes on the interest makes them more valuable.
• How long they last: Tax-free bonds are long-term investments. They typically mature in 10, 15, or 20 years.
• Credit Rating: These bonds usually have a high credit rating, like AAA. This means they are considered very safe investments with a low risk of default.
• Liquidity: You can buy and sell tax-free bonds on the stock exchange, like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). This means you can usually sell your bonds if you need your money before they mature.
• How to Invest: You can buy tax-free bonds directly from the issuing organisation when they are first offered for sale (this is called the primary market). You can also buy them from other investors on the stock exchange (this is called the secondary market).

Advantages of Tax-Free Bonds

• No Taxes on Income: The biggest benefit of tax-free bonds is that you don't have to pay any income tax on the money you earn from them. This means you get to keep more of your money.
• Very Safe: These bonds are issued by government organisations, which are considered very reliable. This means there is a very low risk that you will lose your money.
• Steady Income: The interest rate on these bonds stays the same throughout the life of the bond. This makes them a good choice for people who want a predictable income.
• Easy to Sell: You can sell tax-free bonds on the stock market before they mature. This gives you some flexibility if you need your money early.

Disadvantages of Tax-Free Bonds

• Lower Interest Rates: Tax-free bonds typically offer lower interest rates compared to other types of investments like corporate bonds or fixed deposits.
• Long Investment Period: These bonds have long maturity periods, often 10, 15, or 20 years. This may not be suitable for investors who need their money sooner.
• Interest Rate Risk: If interest rates in the overall market increase, the value of your existing bonds may decrease. This is because new bonds being issued will likely offer higher interest rates.
• Tax on Capital Gains: While you don't pay taxes on the interest you earn from tax-free bonds, you may have to pay taxes if you sell the bonds before they mature and make a profit.

How To Apply for Tax-Free Bonds?

You can buy tax-free bonds in two ways: directly from the organisation that issued them (this is called the primary market) or by buying them from someone else who already owns them (this is called the secondary market). You can apply to buy these bonds online or in person. Here's how:

1. Choose a Financial Institution: Select a reputable financial institution like a bank, stockbroker, or mutual fund company to help you with your investment.
2. Research the Bonds: Learn about the different tax-free bonds available. Compare things like who issued the bond, the interest rate, how long the bond lasts, and its credit rating to make an informed decision.
3. Check Your Eligibility: Make sure you meet the requirements to invest in these bonds. Some bonds may have age restrictions.
4. Open a Demat Account: You'll need a Demat account to buy and hold tax-free bonds. You can open one with the financial institution you choose.
5. Submit Your Application: Apply for the bonds online or by visiting the office of the issuing organisation or your financial institution.
6. Transfer Funds: Transfer the money you need to buy the bonds to your Demat account. It may take a few days for your application to be processed and for you to receive the bonds.
7. Track Your Investment: Keep an eye on your investment by regularly checking your Demat account or by signing up for alerts from your financial institution.
8. Receive Interest Payments: Tax-free bonds usually pay interest either once a year or twice a year. You will receive these interest payments in your Demat account.

Who Should Invest in Tax-Free Bonds?

• People Who Pay High Taxes: Tax-free bonds are a great choice for people who pay a lot of taxes, such as those in the 20% or 30% tax brackets. The tax exemption on these bonds makes them much more valuable.
• Investors Who Prefer Safety: People who prioritise safety and don't want to take big risks with their investments will find tax-free bonds appealing. These bonds provide a steady and predictable income stream over the long term.
• Retirees: Tax-free bonds are a good option for retirees because they provide a reliable source of income without the worry of paying taxes on those earnings.

How to Evaluate Tax-Free Bonds?

• Check the Credit Rating: Look for bonds with a AAA credit rating, which means they are considered very safe investments.
• Compare Interest Rates: Compare the interest rates offered by different tax-free bonds to find the ones that give you the best return on your investment.
• Research the Issuer: Investigate the financial health and past performance of the organisation that issued the bond.
• Consider Interest Rate Trends: Pay attention to what is happening with interest rates in the overall economy. Higher interest rates may result in a lower value for your current bonds.

How to Calculate the Yield of Tax-Free Bonds?

You can calculate the yield of a tax-free bond using this simple formula:

Yield = (Annual Interest Payment / Buying Price) x 100

This yield is especially beneficial for people who pay a lot of taxes. Since you don't pay any taxes on the interest you earn from these bonds, the actual return on your investment is much higher compared to other types of bonds where you do pay taxes.

Recommended Read: Tax-Saving Mutual Funds

Difference Between Tax-Free Bonds and Tax-Saving Bonds

Disclaimer: All the features, interest rates, steps, and other information specified above are sourced when this page was written and are subject to change. For exact information, refer to the respective issuer’s website or contact them.

FAQs on Tax-Free Bonds