INTEREST TAX FREE BONDS
TAX FREE BONDS:
The income by way of interest on these Bonds is fully exempt from Income Tax and shall not form part of Total Income as per provisions under section 10 (15) (iv) (h) of I.T. Act, 1961. These bonds are generally issued by Government backed entities and thus have very low default risk.
OTHER GENERAL FEATURES ARE:
• These bonds can be applied in Physical or Dematerialized mode
• These bonds generally come with long tenures of 10, 15 and/or 20 years, however, these bonds can be traded on the listed exchange if applied in demat mode
• There is no Cap on investment made in these bonds
• Retail Individual Investors get higher interest rates. For an Individual, HUF to be eligible for higher rates the maximum investment amount is Rs.10 Lakhs
• The interest offered is benchmarked to the Government security of similar maturity, subject to conditions laid down by CBDT.
• These bonds however, do not provide any additional tax benefits.
Indica Investments has also the facility to guide its risk averse investors to invest in interest tax free Govt. Bonds or Govt. sponsored Institutional Bonds which provide interest exempted from tax. For example HUDCO, NHB, NHAI are some tax free bonds.
7.8% to 8% in the secondary market.
Score over Debt Funds -
These bonds score over debt mutual funds due to the tax benefits they offer. These bonds continue to enjoy long term capital gains of 10% after 12 months compared to debt funds, where the long term capital gain tax of 20% will be applicable after 36 months.
Short term gains are taxed as per applicable to Individual slab.
Low and at some discount.
The prices of these bonds are inversely related to interest rates. If the interest rates start moving up, the prices will go down and vis a versa.
Currently the interest rates are at near peak levels and we expect it to soften in medium term. The fall in the interest rates could offer Capital appreciation on tax free bonds. The higher the tenure of the bond, higher is the capital appreciation.
Debt Investors may consider tax-free bond issues of NHAI, IRFC as interest rate cut looks a distinct possibility now.