These Bonds are exempted from taxes under section 10 of the income tax act. An investor does not pay tax on the interest earned from tax-free bonds. The Bonds need the central government’s approval at the time of issue.
Tax Free Bonds have low interest compared to other bonds mainly because of the same feature that allows investors from paying taxes on the interest. Most professionals that fall under the tax slab of over 30% choose tax-free bonds.
Tax-Free bonds come with a lock-in period of 10 to 20 years. The issuer of the bond will not pay the amount back until the bond crosses the lock-in period. However, the bonds can be traded in the secondary market and will be taxed as normal bonds under the section of 112 of income tax.
If the issuer sells the bonds to another user, the interest earned by another investor will be at a reduced rate, under 0.50%.
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