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Tax Free Bonds for Senior Citizens

Neha Sharma


Feb 11, 2022

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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.
Read More – Why to invest in Higher Rated Bonds Like AAA, AA+ or A in India?

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


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.
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