With plenty of investment options available today, deciding which instruments to include in your portfolio can be overwhelming. But what if there was a way to invest your funds safely while availing of tax benefits? With tax-free bonds, you can earn interest on your investment and enjoy the benefit of not paying taxes. Plus, the bonds are issued by a company, financial institution, or government and are a relatively safe bet. Here’s everything you need to know about tax-free bonds!
Tax-free bonds are fixed-income securities issued by public sector undertakings. They provide investors with a fixed annual interest and are considered a relatively safe investment. The interest earned is tax-free, allowing investors to maximise their savings. The principal amount is returned upon maturity, just like other bonds.
Typically, there are two types of tax-free bonds to choose from. Tax-free bonds offer interest exempt from taxes, while tax-saving bonds provide tax benefits on the initial investment. Generally, tax-free bonds offer higher interest rates compared to tax-saving bonds.
Investing in tax-free bonds allows you to enjoy the following features:
Apart from offering you tax-free interest, these bonds also provide other benefits. They are as follows:
Investing in tax-free bonds provides a steady, assured income credited to you annually. This interest is tax-free and is in addition to the principal amount that will be returned upon maturity.
Tax-free bonds are issued by public sector undertakings or the government, making them relatively low-risk and less susceptible to default.
These bonds are listed on the stock exchange, allowing you to trade them easily at market prices. You can capitalise on market appreciation to potentially earn a substantial profit.
Tax-free bonds are an ideal investment option for high-net-worth individuals aiming to maximise their wealth. You can benefit from greater returns if you are in the 30% tax bracket or higher. There is no upper limit on investments in tax-free bonds, enabling you to invest more for enhanced returns and increased tax benefits.
Ideally, tax-free bonds are suitable for individuals with a low-risk appetite or those who are risk-averse. Since the government or companies issue these bonds with assets that act as security, there is relatively less risk associated with the investment. Further, they are suitable for those looking to invest longer, i.e., a longer investment horizon. Therefore, consider your financial requirements and need for liquidity before investing in tax-free bonds.
If you want to store your tax-free bond and other investment instruments in a dematerialised form, you cannot go wrong with the HDFC Bank Demat Account. With Free Demat AMC for First Year, low brokerage, and no paperwork, opening the HDFC Bank Demat Account takes less than 10 minutes.
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