I want to invest in government bonds. Are they tax-free? What plans are available for tax-free interest? I want to invest for 7 -10 years.
The Indian government has not issued new tax-free bonds for quite some time, but you can buy some of the tax-free government bonds issued in the past on the stock exchanges. Because these bonds are tax-exempt, they are listed at a significant premium to their issue price, as many taxpayers in higher tax brackets like these tax-exempt bonds. Their Yield To Maturity (YTM) factors in the tax savings the holder enjoys from such bonds. Since these bonds are issued by the government and public sector companies, they are very safe to invest. The current yield to maturity on the tax-exempt bonds ranges between 5% and 5.50%. If you wish, you can purchase one of these tax-free bonds based on the yield to maturity (YTM) and remaining term of the bonds to suit your investment horizon.
RBI floating rate savings bonds vs tax free bonds
Because these tax-exempt bonds trade at a significant premium above their issue price, the YTM is not very attractive to the average investor. I recommend you invest in floating rate savings bonds from the RBI, which currently have an annual interest rate of 8.05%. Resident individuals can invest in these bonds individually or jointly with other residents, and there is no upper limit on investments.
In addition to private individuals, HUF, charities and universities can also invest in these bonds. Unlike the Senior Citizen Saving Scheme, where only senior citizens can make deposits under that scheme, there is no age limit for investing in these bonds. The interest is payable annually every six months, on January 1 and July 1. The interest rate is reset every six months, compared to the National Savings Certificates (NSC) and is 35 basis points higher than the interest rate payable on the National Savings Certificates at the time the interest rate is reset.
The interest on RBI floating rate savings bonds is fully taxable and tax at the applicable rate is deducted at the time of interest payment. These bonds have a term of seven years and cannot be traded on the market. They cannot even be pledged as security for any loan.
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Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant on his X handle.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We recommend that investors consult certified experts before making any investment decisions.
