Right time to pick tax-free bonds

• Post-tax returns are higher compared to fixed deposits

- SAIKAT NEOGI

BUYING TAX-FREE BONDS from the secondary market is an ideal option, especially for those in the higher tax brackets. As the interest income is tax-free, these bonds score over bank fixed deposits (FD) and corporate deposits where the returns are taxed at marginal rates.

These AAA-rated bonds issued by 14 state-owned companies such as National Highways Authority Of India, Indian Railway Finance Corporation, Power Finance Corporation have the highest safety. Investors can lock in their capital for a longer tenure (current residual maturity of up to 10 years) and earn tax-efficient returns.

They can buy these bonds from the stock exchanges as the government has not issued the paper in the primary market since 2016. These bonds were issued by public sector undertakings and financial institutions, suggesting high credit quality and minimal default risk. The level of safety, combined with predictable annual interest, suits high-net-worth investors—who benefit from the superior post-tax yield—and senior citizens needing stable, low-risk cash flows.