Tax free bonds offer tax free income to investors, which means the interest earned on these bonds are exempt from tax. These bonds were issued a few years back by government owned companies and are hence very safe as well. Among the companies that issued these tax free bonds were Indian Railways Finance Corporation (IRFC), Housing and Urban Development Corporation (HUDCO), REC (Rural Electrification Corporation), Power Finance Corporation (PFC), National Highways Authority of India (NHAI) etc.
Where and how to buy tax free bonds?
These bonds were issued a few years back for 10 to 20 years period, and are traded on the stock exchanges and you can sell them very easily, much before the expiry date. So, you buy and sell them in the way you buy and sell shares on the stock exchanges. If you buy and hold them, you are entitled to interest, which is distributed once every year. Some declare interest in Feb-march, while others do so in Oct or December.
One word of caution is that some of these bonds are not very liquid and hence you may not be able to deal in high volumes. Here are 4 tax free bonds that you might want to buy.
IRFC N1 series
The corporation offers an interest rate of 8 per cent every year in the month of Oct. The bonds will mature in the month of Feb 2022, but, as mentioned, one can sell the bonds through the various stock exchanges in the country.
The bonds are rated AAA and offer tax free income to investors. IRFC is a government owned entity and hence there are no worries on the safety of the instrument. It is important to note that the current market price of the bonds are Rs 1,053, as against the issue price of Rs 1,000. If you buy the bonds at a higher rate, your yields tend to fall. So, if you buy them now, your yield would be in the range of around 7.56 per cent.
HUDCO N1 series
The HUDCO N1 series offers an interest rate of 8.2 per cent with the interest payable annually in the month of March every year.
The bonds are currently traded at Rs 1,200 and are fairly liquid. If you buy the bonds now, you would be entitled to dividends in the month of March 2020. The bonds will mature in the month of March 2027.
It is important to note, that you should buy the bonds at a lower rate to improve their yields. One of the other things to note is that you may want to refrain from buying large quantities as some of these may not be very liquid.
REC N5 series
The REC N5 series offer a coupon rate of 8.1 per cent. The interest is paid in December every year. The bonds are currently traded at Rs 1,200 and are reasonably liquid. The face value of the bonds are Rs 1,000 and they mature in Sept 2023. You can sell these bonds through the exchanges.
The bonds are AAA rated and hence are very secure. REC is majority owned by the Government of India and hence are very safe. Investors can buy the bonds for tax free income.
Power Finance Corporation is again a government of India owned entity. The company offers an interest rate of 8.2 per cent on its tax free bonds. The bonds expire in the month of Feb 2022 and interest is paid every year in the month of Oct. The same is also rated AAA.