for tax-free bonds. As of now, IIFCL and HUDCO tax-free bonds are open for subscription and more may follow going forward and investors will have to weigh their options before buying.
Tax-free bonds offer a fixed rate of return for the entire tenure of the product which is tax free in nature whereas in case of inflation indexed bonds the returns move in line with the inflation and therefore the certainty of a fixed amount of regular inflow is missing.
Also, the investment in these bonds will attract tax at the marginal tax rate. The product, however, is more liquid as withdrawal is permitted after completion of three years. In case of tax-free bonds though, premature withdrawal leads to the bonds getting taxable and therefore loses its advantage over other fixed income products.
With inflation-indexed bonds higher the inflation, better are the returns. While investors may hope for such a scenario, that may not be a comfortable and convenient scenario to be in otherwise.
"Since these bonds are taxable, for individuals who fall in the higher tax bracket it makes more sense to go with the tax-free bonds while those in the lower tax bracket and looking for higher liquidity can go with these inflation indexed bonds," said Surya Bhatia, a Delhi-based financial planner.
It, however, looks to be a decent option for investors and one must opt for part investment in these bonds.