The hidden benefit in Tax-Free Bonds

Last updated: 06 Jul, 2020 | 05:46 pm

The hidden benefit in Tax-Free Bonds
Tax-free bonds are bonds that have a special section in the Indian Income-tax Act where the coupon or the principal of the bond or both are exempted from taxation. 

Benefits of Tax-Free Bonds:
  • They are issued by a handful of PSU companies that are operated and backed by the government of India. 
  • These have the highest credit rating possible of AAA. Therefore, they have extremely low credit risk.
  • The yields are less volatile compared to the yields of corporate bonds.
  • They have very high liquidity.

But most tax-free bonds are currently trading at a Yield to maturity (YTM) of ~4.5%. Why invest in a bond at such low yield?

If you are in a high tax bracket, then you definitely must.

Let’s understand how this is beneficial for you! 

Below is an example of an investment of 1 Cr in a HUDCO Tax-Free Bond vs a HDFC Bank Bond with similar maturity dates

  • So your interest earned is significantly higher in the tax-free bond. 
  • However, given the price paid for the bond, you do make a capital loss when the bond matures.
  • So you make a higher capital loss at maturity in the tax-free bond although in total you earn higher
  • However, the key upside in booking a capital loss is that it can be used to offset capital gains you make on other investments across equity, debt, gold or real estate!
  • This gives you an extra benefit that can be carried forward for 7 years.

Summing up:

  • HUDCO Bonds offer nearly ₹6 lakh tax-free every year. This is an excellent option for investors in the highest tax bracket of 42.7%, as there is no other instrument with the same level of safety offering such a high yield.
  • In addition to the higher amount you earn on interest received, you also can use the capital loss to offset gains made elsewhere giving you an extra post-tax benefit.

Finzoom Investment Advisors Private Limited (Brand Name - INDmoney, INDwealth,,, makes no warranties or representations, express or implied, on products and services offered through the platform. It accepts no liability for any damages or losses, however, caused in connection with the use of, or on the reliance of its advisory or related services.

Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs. Performance and returns of any investment portfolio can neither be predicted nor guaranteed.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Marketing and distribution of various financial products such as loans and deposits are powered by Finzoomers Services Private Limited.

INDmoney, INDwealth, are brand and product of Finzoom Investment Advisors (P) Limited.

© Finzoom Investment Advisors Private Limited

[SEBI RIA Registration No: INA100012190] [Type of Registration: Non-Individual] [Validity of registration: December 17, 2018-Perpetual] [Address: 616, 6th Floor, Suncity Success Tower, Golf Course Extension Road, Sector – 65, Gurugram, Haryana- 122005] [Principal Officer details: Mr. Gaurav Sharma, Email id:, Contact No. 8800826254] [Corresponding SEBI local office address: Securities and Exchange Board of India, Local Office, First Floor, SCO 127-128, Sector 17C, Chandigarh-160017]

[ARN - 151913] [Platform Partner : BSE (Member code-24801)] [CIN - U67190HR2018PTC073294] [GST No : 06AADCF3538Q1Z8]