Tax-Free Bonds in India 2023 – How to Buy Tax-Free Bonds? | Senior Citizens | Highly Rated & Best Tax-Free Bonds

Tax-Free Bonds in India 2021

What are Government Tax-Free Bonds 2023 in India?


If you are looking for such kind of investment, which guarantees return, has low or no risk, and has commendable gains. However, In some scenarios, you would think Bank’s FDs are the best and safest option, But if you check closely, the gains in Bank’s FDs are not that attractive compared to a host of other investment options.
Even interest earned on Bank FDs is taxable. Therefore, you don’t get exactly what is promised.
What would be better than having an investment which is tax-free on interest along with guaranteed returns and low risk?
If you want these advantages while making an investment, then Tax-Free Bonds 2023 in India are the best option for you.

Also Read List of Government Bonds in India – Short-Term and Long-Term Bonds

Indian Tax-free Bonds are mostly issued by government enterprises and pay a fixed interest rate.
As the proceeds from the bonds invest in infrastructure projects, they have a long-term maturity of typically from 10 to 20 years.

When you buy Tax-Free bonds, you are lending amounts to these government-held companies, which means safety is assured. Even though these bonds are offered by state-run companies, do check the ratings.

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Highly Rated Tax-Free Bonds 2023 in India


Generally, some rating agencies like CARE, CRISIL, ICRA regularly assess companies and their financial health.
They then issue a rating for the companies. A higher rating means better financial health.
These rating agencies also issue credit ratings for tax-free bonds. This enables investors to assess the quality of instruments.

A AAA credit rating, as you can probably guess, means that there is virtually zero chance of a default occurring.

Also Read SBI Capital Gain Bonds | 54EC Bonds | Features | Interest Rate | How to Buy SBI Online?

CompanyCredit Rating
PFC – Power Finance CorporationCRISIL AAA/Stable by CRISIL,
NHAI – National Highways Authority of IndiaCRISIL AAA/Stable by CRISIL,
IRFC – Indian Railway Finance CorporationCRISIL AAA/Stable from CRISIL
HUDCO – Housing and Urban Development CorporationCARE AA+ by CARE
REC – Rural Electrification Corporation LimitedCRISIL AAA by CRISIL,

The company makes a commitment to pay interest on the principal and to return the principal. Whether the company makes profits or incurs losses, is irrelevant to the terms and conditions.

It still has to give the interest rate promised and return the funds on the specified date. Therefore, when you purchase a bond, you borrow the amount from the company that issued the bond.
In exchange, the company promises to return your principal amount on the maturity date, and till it does so, it will pay you a specified rate of interest.

Let’s take a closer look at the characteristics of the bonds before going ahead.

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Tax-Free Bonds – YIELD, Coupon Rate, Face Value, Price of the Bond

  • Face Value – Face Value is a static value assigned when a company brings a tax-free bond to the market. Unlike the market value, face value doesn’t change. You will find the face value printed on the Tax-Free bond certificate. The face value of a bond is also known as the Par value.
  • Coupon Rate -The coupon rate is the rate of interest paid by issuers on the bond’s face value.
    It is the regular rate of interest paid by issuers to its bondholder. The coupon rate is calculated on the bond’s face value, not on the issue price or market value.
    For instance, if you have a 10-year- INR 2,000/- bond with a coupon rate of 10%, you will get INR 200/- every year for 10 years, no matter what happens to the Tax-free bond price in the market.
  • Price of the Bond -When bonds can be bought from and sold to other investors on the secondary market.
    However, bond prices can be higher or lower than the face value (Par value) of the bond because of the current economic environment and the financial health of the issuer.
    For instance, if a bond has a par of INR 1,000/- and is sold for INR 900/-, the price is published as 90%.
  • YIELD – Yield means the returns an investor will derive by investing in a Tax-free bond. The mathematical logic for calculating yield is the annual coupon rate divided by the current market price of the bond.
    For instance, if the bond price of the 10-year bond with a face value of INR 1,000/- and a coupon rate of 6% falls to INR 600 in the secondary market, it will still fetch the interest of INR 60 per year per bond, resulting in an increase in yield to 10%.

Also Read What are the Treasury Bills in India? – Maturity Period | Features | Issued by


  • RIIs (Retail Individual Investors) – Including members of HUF (Hindu undivided family) and NRIs (Non-Resident Indians).
  • HNIs (High Net-worth Individuals) – have a low-risk appetite and can invest up to INR 10 lakhs.
  • QIBs (Qualified Institutional Buyers) – have been defined under the SEBI Guidelines, 2000.
  • Corporate, trusts, co-operative banks, regional rural banks.

Also Read Government Bonds India – A Detailed Guide for 2021

Features of Tax-Free Bonds in India

Investment throughOnline or Offline.
Mode of HoldingPhysical or Dematerialized mode
Face ValueINR 1,000/-
Investment Limit Generally, 5 bonds ( INR 5,000/-), individually or collectively across all Series of Bonds and in
multiples of 1 Bond ( INR 1,000/-) thereafter.
TransferabilityNon-transferable and Non-negotiable
Loan facilityNo
Lock-in Period10 to 20 years.
Interest paymentThe interest will be paid annually on a fixed date. However, there is NO cumulative option.
Coupon Rate 6.50% to 7.50%,
Tax BenefitInterest earned would be tax-free. The tax-free status of interest income is as per Section 10(15)(iv)(h) of the Income Tax Act, 1961.
There is no tax saving on the amount invested in these bonds. Therefore, section 80C,80CCF, 80D,54EC, etc. are not applicable.
LiquidityThese bonds are not as liquid as debt funds. As these are longer investment bonds, liquidating them may not be easy. Therefore, this cannot be treated as an emergency fund.
However, bondholders can trade these bonds at any time as per the ongoing market rate.
Any profit from the sale of these bonds will be taxed under the Income Tax Act.
TDS Tax deducted at Source does not apply.

Also Read RBI IINSS-C Bonds Inflation Indexed National Savings Securities-Cumulative

List of Best Tax-Free Bonds 2023 in India

Source –

Also Read RBI Bonds or Floating Rate Savings Bonds | Rate of Interest | Online & Offline

How to Buy Tax-Free Bonds 2023 in India?


Primary Market


When the company issues bonds to the public, the investor can subscribe by applying online or offline.
You will be required to fill up a revised application form either online or offline and submit appropriate documents along with a cheque or demand draft of the amount you’d like to invest.
There are more than 20 nationalized banks that can help you invest in these bonds.
Once invested, you will receive the bond in your BLA i.e. Bond Ledger Account), along with the Certificate of Holding.

Also Read How to Buy 54 EC REC Bonds Online?

Secondary Market


Investors (s) can buy and sell these bonds on the stock market. However, the interest earned on these bonds is tax-free, and any capital gain from the sale in the secondary market is taxable.
STCGs(Short-Term Capital Gains) from the sale of tax-free bonds on the exchanges are taxed at the normal rate,
while LTCGs(Long-Term Capital Gains) are taxed at 10 percent without indexation (i.e. Indexation is a method used by investors to prevent tax loss on investments) and 20 percent with indexation, whichever is lower.
By indexing, you adjust the buy price with annual inflation.

Also Read RBI RDG Account – Buy & Sell G-Secs, Bonds, T-bills, and State Development Loans

Tax-Free Bonds for Senior Citizens


These bonds are low-risk investments as the schemes are backed by Government companies.
Therefore, the chances of default are very low. In addition, these bonds offer capital protection and promise regular income in the form of interest payments.
Therefore, it is an ideal investment option for senior citizens. However, there is a lock-in period, investor(s) can sell the bonds on the stock exchange.

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Are Tax-Free Bonds a Good Investment?


Let’s take one example – assume you buy a bond issued from the primary market.

  • Par Value & Price of bond – INR 1,000/-
  • Coupon Rate – 8% p.a.
  • Yield – 8% p.a.

You can assume that ROI (i.e. rate of interest) in the economy rise and one can get bonds offering more than 8 percent per annum. So, if you want to sell in the secondary market, you will have to make it attractive. Therefore the price of this bond will have to fall.

  • Par Value – INR 1,000/- & Now Price of the bond is INR 900/-
  • Coupon Rate – 8% p.a.
  • Yield = 8.8% p.a.

If the price of the bond is lesser than the Par value, then the yield for holding such bonds will be higher. If the price of the bond is more than the Par value, then the yield of holding such bonds will be lesser.
The falling interest rate scene makes these bonds attractive. Since they are offering a better return than what is available right now.

In conclusion, Tax-free bonds are a good option for anyone looking for a fixed tax-free income from investments.
If you are looking at Bank FDs and corporate bonds as an investment option, you should also consider tax-free bonds an option.
It is a safe alternative to fall back to without having to worry about liquidity.
However, a major drawback of these bonds is the fact that the interest rates here are much lower as compared to other types of long-term investment.

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