Tax-free bonds: Bond to the rescue

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Tax-free bonds have become a popular tool in the investment circle and steadily gained popularity among long-term investors due to tax benefits. Tax-free bonds have become a popular tool in the investment circle and steadily gained popularity among long-term investors due to tax benefits.
SummaryTax-free bonds can be used, especially by those in higher tax brackets, to generate fixed monthly income.

Tax is paid every month after the income from the sale is received.

* Brokerage charges are not considered as they vary from one investor to other and across brokering houses.

Investment tenure

Variations caused by increased investment tenures can be adjusted either by cutting down the percentage of the sale of bonds or doubling investment. So you need to purchase bonds worth at least R1.5 lakh to R2 lakh if you have to sell 1% of the bond and receive R1,000 as monthly income for 15 to 20 years.

Annual interest

Further, you will get your annual interest, which can be utilised for further investments or for any financial need that you are unable to meet with your monthly income from the sale of tax-free bonds. The interest thus serves as a bonus.

Primary objective

The idea is to generate a fixed monthly income while keeping investments as tax efficient as possible. This is why you need to start selling soon after completing the one-year period. You will have to pay only 10% tax on long-term capital gains that you make by selling them.

This method of investment in tax-free bonds is also a suitable option for senior citizens looking for a fixed monthly income by investing their pension amount in government-backed investment initiatives.

It is definitely a better option than investing in mutual funds, fixed deposits and other taxed bonds, especially for those who fall under a higher tax bracket. With the government recently allowing 13 institutions to raise more than R48,000 crore by issuing tax-free bonds, and with several companies awaiting Sebi’s nod for such issues for infrastructure development, tax-free bonds are bound to move up the chart as one of the most favoured options for investors.

The writer is CEO, BankBazaar.com

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