Some investors are looking for long term safe investments which can save tax also. Tax-Free bonds are the best option for this type of investors. Governments companies like NHAI, HUDCO, NTPC, REC, PFC, IREDA and REL are offering this type of bonds. Generally tax free bonds are considered a low-risk investment.
Understanding Tax Free Bonds
In simple words, you are investing money into the government companies on annual interest basis. Normally, these bonds consist of long term duration, like 10 years, 15 years or 20 years. On maturity, you get principal amount back, and you earn interest every year, which is totally tax-free.
Individuals and HUF are eligible to buy these types of bonds, and there is no maximum limit for the investment.
Currently these types of bonds are not available in the primary market, but you can buy them on secondary market or BSE or NSE. These bonds will have different maturity dates. In the primary market, bonds are available at the face value, but in the secondary market the value can be different, however the interest rate you earn is fixed based on the face value only. So, if bonds are traded at lesser price than the face value, then returns are more and if bonds are traded at higher price then returns are less.
The interest earned on these Bonds is totally Tax-Free.
Taxable bonds are available from RBI, Corporates and Banks. Generally they offer 7% to 9% interest rate.
54EC Taxable bonds
Taxable bonds can also be used to save tax liabilities arising out from Long Term Capital Gains Tax. These bonds are called Long Term Capital Gains Tax bonds or 54EC bonds. Government companies REC, PFC, NHAI offers these bonds. These bonds are considered low-risk investment.
In addition to taxable and tax-free bonds, investors have option to invest into corporate fixed deposits. Organizations like HDFC Ltd, Bajaj Finance, LIC Housing, Gruh Finance, Tata Finance, and many others offer fixed deposits. Interest rates may vary from organization to organization. However, these deposits are non-transferable and pre-mature redemption is not allowed. Interest earned on these deposits is added to the income earned by the investor and taxed based on the applicable tax slab. Usually, these deposits have lock-in period of 1 to 7 years and offer more interest rate compared to banks fixed deposits.
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