Tax Saving: How tax-free bonds are helpful in accumulating wealth?

There are a lot of options in the market for investors and thus taking a decision to choose the right savings instrument could be overwhelming. Among all of these, there is also an easy way to invest your funds along with the tax benefits. We're talking about tax-free bonds, where one can earn interest on the investments and further enjoy the benefit of tax deductions.

These bonds are usually issued by a company, financial institution, or the government and are, therefore, can be considered a relatively safe bet. If you are planning on investing in tax-free bonds, here's everything you need to know about them and how you can save taxes.

What are Tax-Free Bonds?

Tax-savings bonds are an ideal choice for those who are looking for a fixed income, for example, senior citizens. These bonds are issued by a government enterprise or other public undertakings to ensure fixed-income. They come with a fixed interest rate and rarely default. Thus, they can be considered as a low-risk investment avenue.

Also, as the name suggests, one of the most attractive features of tax-free bonds is that the interest earned is tax-free. This enables investors to save more money in the long run. Just like other bonds, the principal amount is repaid upon maturity.

Tax-free bonds benefits

The interest earned on tax-free bonds is completely exempted from taxes as per Section 10 of the Income Tax Act of India, 1961. While these bonds allow investors to earn tax-exempted interest, the initial investment on many bonds are also eligible for deductions.

Tax-free bonds are generally long-term plans that come with a long-term maturity of ten years or more.

How do tax-free bonds help in savings?

Apart from tax-saving interests, these bonds come with a number of benefits that can help in savings for the future. Some of these benefits are:

Regular income: Tax-free bonds are an assured option for regular income that is credited every year. The interest is paid annually, and the principal is returned upon maturity.

Ease of Trading: As these bonds are listed on the stock exchange, one can easily trade their bonds as per the market price and make earnings when the prices go up.  

Lesser risks: These bonds are issued by a government or public sector enterprises. Also, they offer capital protection and a fixed monthly or annual income.