Tax Free Bonds - time to balance your long term investments

The debt market for retail investors recently has got a new option in the form of high return tax-free long term bonds from major public sector organisations. With the Direct Tax Code set to be implemented, the opportunities of reducing our tax burden is increasingly getting lesser. In that regard, tax free bonds give us an way to reduce the tax burden while maintaining the income levels. The also provide guaranteed returns so also provide a pay to balance the overall investment portfolio.

Last month we had PFC coming out with their issue. And right now we have Indian Railway Finance Corporation and HUDCO with their issues. There are expected to be other similar issues also as due to fund crunch, the Govt of India is not in a position provide funds to PSUs for funding infrastructure work. Also, due to current market conditions, the prevailing interest rates are high and even tax-free bonds are offered at higher than 8% coupon rates. The advantage of a tax-free bond is that the interest earned is fully exempt under Sec 10 of the Income Tax Act. A tax-free bond carrying 8% coupon rate gives about 11.90% pre-tax return to someone with 30% tax bracket. And this return is assured for the full length of the investment i.e. 10/15 years. Presently, no investment is willing to guarantee that sort of return over that long a period of time.

So, if you have investable funds and want to have reasonable guaranteed return for at least a part of your portfolio, make sure to invest in Tax-free bonds.

Only remember to check the credit rating before investment and invest in organisations with a rating of AA+ or higher.

Excellent opportunity for those who want good quality debt instruments especially those who are in the higher tax brackets. For those who are not in higher tax brackets look at it this way that future might bring you better income and having these tax free bonds in your portfolio would always help.