Bonds are financial assets that allow both investors and traders to buy or sell claim against different types of debt. Counted as amongst the most common type of fixed income investment, bonds embarks where an investor agrees to pay loan money for a predetermined rate of interest.

Why invest in bonds?

Investing in bonds maintain a diversified investment portfolio, bonds pay interest semi-annually. This somewhere also hints that an investor can maintain a regular stream of income by investing in bonds.

  • Active Management
  • Diversification
  • Automatic Income Reinvestment
  • Liquidity

Types of Bonds:

A) Tax Free Bonds: When the stock market turn out to be volatile, anxious investors often flock to the safety of bonds and the income it generates.  Tax free bonds are issued by Government enterprises on a fixed coupon rate.  Not only does interest earned on tax free bonds are exempted from taxes but capital gains too are far better in comparison with other deposit schemes available. Furthermore, an investor holds the opportunity to book profits by selling bonds and obtaining long term gain.

Individuals who fall in higher tax bracket category should primarily consider investing in tax free bonds. The tenure is long term 10, 15 and 20 years that can help individuals build retirement savings. Find out the most common reasons for investors to purchase bonds:

Benefits of investing in tax free bonds:

  • Earn tax free income
  • Low risk of default
  • Liquidity as listing of bonds are on various exchanges
  • Demat form facility makes it easy to monitor and handle investment
  • Diversification as bonds appears to be less volatile than stocks
  • Stability as majority of return on bonds comes from the interest payments

B) Capital Gain Bonds:
Often investors sitting on large capital gains from the sale of a property or other instruments find themselves engrossed under the tax dragnet. If similar are consequences with you, obtain savings on long term capital gains taxes by investing in capital gain bonds.

Who should invest?
Those in need of obtaining exemption from capital gains tax under Section 54 EC may invest in bonds. If you've made long-term capital gains by selling a property you held for last three years, you have to pay 20% in taxes. But if you invest in capital gain bonds as specified under Section 54 EC of the Income tax Act, you're exempted to pay that 20% in taxes.

Key Features:

  • Minimum investment of Rs10,000 and in multiples of Rs10,000 thereafter
  • Interest payment is semi- annually, annually and cumulative
  • Lock-in-period of 3 years for all the structures
  • No TDS on Interest payable for Resident Investors
  • NRIs, OCBs or FIIs are eligible to invest on non-repatriation basis