How Do Tax-Free Bonds Work, and Are They a Good Investment for 2025?
Tax-free bonds are a fixed-income investment. Under these bonds, the interest provided to the bondholders is not included in the income tax. Government entities such as municipal corporations, government companies, public sector undertakings, and many infrastructure companies issue these bonds. These are effective tax-saving mediums for investors. Hence, any investor seeking to enhance their returns and lower their income tax liability can prefer tax-free bonds. In this article, you will learn about the type of tax bonds, the workings of tax-free bonds, and what makes them a good investment for 2025.
Types of Tax Bonds
Tax-free bonds are introduced in India to finance infrastructure and government projects, and they are a great investment option for individuals looking for tax-saving benefits. Some of the common types of tax-free bonds include the following:
Infrastructure Bonds
These bonds are basically issued by infrastructure companies and are utilised for funding projects such as airports, roads, and power plants.
Power Bonds
These bonds are issued by power generation companies and utilised for investments in the maintenance and expansion of power plants.
Public Sector Unit Bonds
Government-owned companies issue these bonds, which are later used to fund multiple projects, such as housing initiatives and infrastructure or power projects.
Housing Bonds
Entities like the National Housing Bank issue these bonds, which are used to finance affordable housing projects.
Railway Bonds
Indian Railways issues the railway bonds. Hence, the funds gathered from these bonds are utilised to fund the modernisation and expansion of the railway network.
How Do Tax-Free Bonds Work?
To invest in any type of tax-free bond, an individual needs to have a Demat account, and investors can sell or buy such bonds on the stock exchange. Moreover, investors can also use online trading platforms to trade these bonds for short term capital gain. Hence, the interest they earn on such bonds is exempted from tax and directly gets credited to the investor’s bank account. Such tax-free bonds mentioned on the stock exchanges provide flexibility in regard to liquidity. Because of their tax-exempt feature, these bonds usually experience low supply and high demand, especially during the tax-saving season.
Are Tax-Free Bonds a Good Investment In 2025?
There are many tax-free bonds to invest in 2025. These bonds are suitable for :
- Long-term investors who have a tenure of 10 years or above.
- Investors who are not fond of risks and prefer stable and safe returns
- Investors who come under the bracket of high-income tax, as the interest gained from these bonds, are exempted from tax
Some of the tax-free bonds investors can consider for 2025 include:
| Tax-Free Bond Issuer |
Interest Rate |
Maturity Date |
Yield to Maturity |
| National Housing Bank |
9.1 |
16-Nov-2033 |
5.01 |
| National Highways Authority of India |
8.75 |
05-Feb-2029 |
5.48 |
| Rural Electrification Corporate Limited |
8.71 |
24-Sep-2028 |
5.49 |
| NTPC Limited |
8.91 |
16-Dec-2033 |
5.6 |
| Housing & Urban Development Corporation |
7.64 |
8-Feb-2032 |
5.7 |
| Power Finance Corporation Limited |
8.67 |
16-Nov-2033 |
5.20 |
| Indian Railways Corporation Limited |
8.63 |
26-March-2029 |
5.11 |
Benefits of Tax-Free Bonds
Some of the major benefits that an investor explores after investing in tax-free bonds are:
Stable Income: By investing in tax-free bonds, investors earn a guaranteed annual income.
Security: Investors are attracted to tax-free bonds as they offer a tax-free, constant income source with zero chances of losing any money.
Easy Trade: Tax-free bonds can be traded easily on stock exchanges with a satisfactory liquidity level, making it efficient for investors to buy and sell bonds as and when needed.
Higher Profit For Higher Tax Bracket: Investors who have higher tax brackets may get an advantage from investing in these bonds as the interest gained does not stand subject to income tax.
Summing Up
Tax-free bonds are an amazing investment tool for investors who do not prefer taking risks. Moreover, they are quite efficient for investors willing to invest for longer durations. Hence, before investing in a tax-free bond, be sure to consider your liquidity and financial requirements. To gain additional surety on your profits, learn how to calculate income tax. Additionally, consult with a financial advisor to ensure the bonds align with your overall investment strategy and goals.
FAQs on Tax-Free Bonds
1. Is it advisable to invest in tax-free bonds?
As government organisations back tax-free bonds, you can earn annual guaranteed income by investing in them.
2. What is a 5-year tax-free bond?
A 5-year tax-free bond, such as those issued by NHAI, is a fixed-income investment with a lock-in period of five years, offering a tax-exempt interest of approximately 5% annually.
3. Can I sell my tax-free bonds before maturity?
Yes, you can trade your tax-free bonds before their maturity period in secondary markets.
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