Budget 2025: Tax-Free Bonds And Who Should Invest In Them — Explained

Tax reforms and relief are among key expectations from the upcoming Budget 2025. After all, taxpayers' focus remains on how to save tax and have more money in hand. As expectations rise on what the budget has in store, in terms of income tax related changes, there is a key tax-free investment options that taxpayers may consider — the tax-free bonds.

As the name suggests, tax-free bonds refer to bonds that come with tax-free interest income. Under Section 10(15) of the Income Tax Act, 1961, these bonds that are issued by the government or public sector undertakings or PSUs provide an opportunity to earn interest income that is entirely tax-free. Tax-free bonds are usually open for subscription during a specified time. Investors can either buy these bonds during the subscription window, or purchase them through stock exchanges in the secondary market.

Tax exemption

As mentioned above, the main feature of these bonds is that the interest income derived from them is entirely tax-free, meaning it is completely exempt from income tax. However, one needs to note that only the interest on it is exempt and not the principal.

Long-term investment

This is an ideal investment option for long-term investors, as the tenure typically ranges from 10 to 20 years.

Fixed interest rate

These bonds usually come with a fixed interest rate, known as coupon rate, either paid annually or twice a year.

Issued by government-backed entities

National Highways Authority of India, Indian Railways Finance Corp., Rural Electrification Corp., Power Finance Corp., and Indian Renewable Energy Development Agency Ltd. are among the government-backed entities that issue tax-free bonds.

Liquidity

Since these bonds are listed on stock exchanges, they can be bought and sold before maturity.

Low-risk investment

Being backed by government entities, the risk with tax-free bonds is relatively lower, compared to other investments.

• Long-term investors as they typically come with a tenure of 10 years or more.

• Those who fall under high income-tax bracket, as the interest income earned is not taxed.

• Risk-averse investors who seek safe and stable returns.