Before investing in bond market, it is necessary to have enough knowledge about it. You should be aware about the facts of eligibility, types of bonds, tax advantages, rate of interest applicable and so on. Are these bonds genuinely suitable for you? What are the risks involved? In every investment, you have to study two factors: the promise factor and the risk factor.
Due to the tax benefits of tax free bonds, these have acquired immense popularity in the bond market. Other bonds are also purchased by investors. But tax free bonds have a special advantage.
Features and advantages
Mostly issued by government entities, these bonds have a fixed rate of interest and the maturity period is relatively longer. You are not required to pay income tax on the interest earned on these bonds. Yes. You read it right. The interest on these bonds is not included in your total income. No tax, No TDS, Only savings! It must be noted that as no income tax is to be paid, you will also not get tax deduction for the investment done in these bonds.
Interest rate and payment
The interest rate of these bonds is subject to the existing interest rates of government based securities. So, you will definitely enjoy higher interest when the rates are higher.
The payment of the interest is made by directly transferring to your bank account. Hence, you are required to provide with your bank account details at the time of purchase of these bonds. The interest payment is done on annual basis. You may expect a large chunk of interest from these bonds.
Nature
These bonds are generally traded in both the ways: demat as well as physical. As these are issued by government entities, one can ensure that they are less risky and you are bound to get repayment of your entire amount and interest.
Which one is better – traditional fixed deposit or bonds?
Here, we are specifically mentioning about tax free bonds as one may not be familiar with the advantages it offers. A bank customer is well-versed with fixed deposits and recurring deposits. You may feel that it is risky to invest in these bonds and prefer to opt in investing in fixed deposits. But before jumping to a conclusion, let us understand both the options in light of its advantages.
When you invest in fixed deposits, your interest earned on it will be included in your total income and you have to pay tax for it. The feature of tax exemption is the main benefit found in tax free bonds. Hence, the name tax free bond is given particularly. The only issue arises of the liquidity. Fixed deposits are not of long maturity tenure; hence these can be liquidated easily in the case of emergencies. But tax free bonds do not enjoy liquidity. So, if you want to lock-in your money for a long tenure, then you may surely invest in these bonds.
Conclusively, if you are looking for steady source of income in a year, desire to lock-in your money for longer time and want to save tax on your earned income, then bonds are the best option for you to invest.
