Tax Free Bonds for Senior Citizens
Let us assume that you or someone close to you is going to turn 60
years old, i.e., turning a senior citizen. When you reach this time of life, you
will benefit from a higher
interest rate on fixed deposits and other investments, among other things.
Senior citizens, on the other hand, must continue to pay taxes even after
retirement. This is why it is critical to identify the finest tax-saving instruments
to reduce your tax bill once you retire. And therefore, below are a few ideas for
lowering your tax bills using tax-free bonds.
What are tax-free bonds & Who is the issuer of these
bonds?
Tax-free bonds are
government securities whose interest is fully exempt from income tax and does
not count toward total income under the provisions of section 10 (15) (iv) (h)
of the Income Tax Act of 1961. In general, investors perceive tax-free bonds to
be a low-risk investment option. These bonds have a long-term maturity of at
least ten years. The government normally invests money from these bonds on
infrastructure and housing projects. Tax-free bonds can be an ideal choice for the senior citizens in many ways. It can not only help them avail the benefit of tax but also gain a good return on investment in comparison to other investment avenues.
To add in, Government-backed entities typically issue these bonds to raise
revenue for a specific purpose. These bonds have a very low chance of default.
For Example, Municipal bonds
are a tax-free bond that has a fixed rate of interest and no risk of
default.
Characteristics of Tax-Free Bonds
Moving forward, before investing in these one must be aware of its
characteristics to better comprehend them.
Here is a list of some of them:
| Particulars |
Explanation |
| Tenure |
Tax-Free bonds when issued have long-term maturities of 10, 15, or
20 years |
| Interest rate% |
The yield on these bonds runs from 4.25% percent to 5.00% percent in
secondary market, which is rather appealing given the tax exemption
on interest |
| Low risk |
Because these bonds are issued by Govt Companies, the possibilities
of default on principal and interest payments are relatively very
low. Tax-free bonds provide capital protection and a predictable half
yearly and annual interest.
|
| Liquidity |
These bonds do not have any lock-in term, and easily tradeable in
secondary market and exchanges (NSE/BSE/WDM/RDM) |
| Issuance and Transactions |
Tax-free bonds can be held in either a Demat or physical form. These
bonds can be bought from the secondary market as well.
|
What is the best way to invest in Tax-Free Bonds & how to
redeem them?
Tax-free bonds include a trading mechanism that allows them
to be traded electronically or in person. Investing in such tax-free bonds, on
the other hand, is simple and pays off handsomely. When opting for such tax-free
bonds, one should keep in mind that the subscription period is only open for a
limited time.
To subscribe tax-free bonds in physical, you must submit
your KYC information, like PAN and address proof and in demat you have to fill
only demat details. Trading is available to you via your Demat account after
authentication. As a result, trading tax-free bonds is similar to stock market
trading.
Subject to the bond’s term conclusion, the redemption procedure for
tax-free bonds is quite straightforward. However, you will not be able to
withdraw your tax-free bond before its maturity date, and it will only be
available for trading with other investors on stock exchanges. Furthermore,
under the rules of Section-112 of the Income Tax Act of 1961, Capital
Gains/Loss on the Purchase or Sale of these tax-free bonds are subject to
taxation based on the investor's income tax bracket.
Does tax -free bonds have a lock-in period?
Incase of tax-free bonds, there is not any standard lock-in period. The government issues Tax-free bonds with long term maturity that includes a term commencing from 10, 15, to 20 years. Investors are not allowed to withdraw their principal invested in tax-free bonds before the end date of maturity. Investors have the option to encash the bonds through the sale of your bonds on registered stock exchanges. These bonds are relatively more secure but have limited liquidity.
Why are Tax-free bonds a beneficial investment for senior
citizens in India?
Tax-free bonds are available to high-net-worth individuals,
trusts, HUF members, cooperative banks, and qualified institutional investors.
These tax-free bonds are beneficial to investors who fall into the highest tax
bracket. However, for investors such as senior citizens, longer tenure, lower
default risk, and fixed income for a longer period make such bonds a suitable
option.
Tax-Free Bonds available in the secondary market for
senior citizens
In general, rating organizations like CARE, CRISIL, and ICRA
examine enterprises and their financial health on a regular basis. The companies
are then given a rating. A higher credit score indicates better financial
health. A ‘AAA’ credit rating, as you may have guessed, indicates that there is
virtually no risk of default. Let us look at some from them –
| Name of the Company |
Rating |
| REC- Rural Electrification Corporation Limited |
AAA by CRISIL, CARE & ICRA |
| PFC – Power Finance Corporation |
AAA by CRISIL, CARE & ICRA |
| NHAI – National Highways Authority of India |
AAA by CRISIL, CARE & ICRA |
| IRFC – Indian Railway Finance Corporation |
AAA by CRISIL, CARE & ICRA |
| HUDCO – Housing & Urban Development Corporation |
CARE AA+, IND AA+ by IRRPL |
Conclusion
For the senior citizens in India who wish to have returns that can prove to be a hedge over inflation, tax free bonds can be a worthwhile investment option. It is also known to offer interest more than fixed deposits with minimal risk of capital loss. It is like a risk-free option backed by government. The Income Tax Act, 1961 makes your interest income from the Tax-free Bonds investment exempted from tax. It can also prove useful for taxpayers in the higher tax brackets.
Spending more time with your family, traveling across the world,
and having a nice time are all benefits of retirement. You not only meet your
income needs but also lower your tax burden each year by investing in tax-saving
financial instruments & therefore investment
instruments such as tax-free bonds can be a good option for senior citizens in India.
