Indian investors are becoming increasingly interested in safe investments, fixed-income investment alternatives that not only provide consistent returns but also offer tax benefits. Tax-free bonds are just one of such well-known investment instruments. Such securities, sponsored by the government, offer attractive interest payments, tax-free, which attract a majority of risk-averse investors and high-income earners.
In the given blog, we have mentioned the list of tax-free bonds that will be provided in 2025, their advantages, working process, and why they can make a very good addition to your investment portfolio.
What are the Tax-Free Bonds?
Tax-free bonds are a fixed-income investment form issued by government-backed bodies, such as NHAI, IRFC, PFC, and REC. The most outstanding merit of the tax-free bonds is that the tax remitted on the interest earned on the bond is not income as per the Income Tax Act, 1961, under Section 10(15)(iv)(h).
The bonds are typically long-term, ranging from 10 to 20 years, with yearly interest payments. The process involves the issuance of bonds by government-owned organisations, and hence the risk is very low, which is why these bonds are the most preferred by conservative investors.
Why Make the Investment in Tax-Free Bonds?
Tax-free bonds offer a smart option for generating a locked-in profit in the current economic climate, where interest rates are expected to remain flat or increase slightly. Such bonds provide predictable annual returns, in addition to not paying tax on the interest amount.
The effective post-tax rate of interest on tax-free bonds can be greater than the effective post-tax interest rate on taxable bonds, such as a bank fixed deposit or a company bond, for investors in higher income tax brackets. Additionally, they are traded on the stock market and are liquid, allowing you to sell them earlier than maturity if desired.
Features of Tax-Free Bonds
Tax-free bonds issued in India are still expected to adhere to the conventional characteristics of the previous tranches. These include:
- Fixed-Issuers wherein the interest rate is fixed on an annual basis between 5.50% to 6.75%
- 10-year, 15-year, and 20-year terms, which are applicable to long-term planning of finances
- Tax Exemption on interest Income
- Traded on BSE and NSE and offers resale of the security prior to maturity
- These are issued only by PSUs with a good rating, so this would be safe for capital
These characteristics make tax-free bonds a perfect financial instrument for retirees and long-term investors, as well as those who prefer generating tax-free income while preserving capital.
Who Should Invest in Tax-Free Bonds?
Tax-free bonds are best suited for:
- High net-worth individuals (HNIs) in the 30% or 20% tax bracket
- Aged people and retirees in search of a steady yearly income
- Holding conservative investors who care about the stability of the capital
- People who have long-term objectives such as child education or retirement
If you are the kind of person who prefers the stability of fixed deposits but desires to earn superior after-tax returns compared to traditional fixed deposits, then Indian tax-free bonds are a good choice.
List of Tax-Free Bonds in 2025
Although the issuance of new tax-free bonds is subject to government permission, the issuance of such bonds has traditionally been done by the following Public Sector Undertakings (PSUs), and it has been suggested they will issue more of them in 2025:
1. National Highways Authority of India (NHAI)
The most in-demand are NHAI optional bonds, which are exempt from tax. These bonds have been offered at interest rates ranging from 6.25 to 6.75% and have tenures of 10 to 20 years, supported by the Ministry of Road Transport and Highways. The NHAI bonds are regarded as very credible and are secured by infrastructure.
2. Indian Railway Finance Corporation (IRFC)
As the financial arm of Indian Railways, IRFC has outstanding tax-free bonds that are issued as safety bonds. Bonds issued by IRFC, which are listed on the stock market, are also liquid. The 2025 issue will also deliver competitive interest rates with long tenures to the investors.
3. Power Finance Corporation (PFC)
One of the biggest NBFCs in the power sector, the issuer of PFC tax-free bonds, has totally different aspirations. There has been a steady demand for such bonds by investors due to their high safety ratings and favourable tax-free yields.
4. Rural Electrification Corporation (REC)
The REC bonds are renowned for their attractive coupon rates and government ownership. REC finances rural electrification at a very high rate and its tax-free bonds are hailed as reliable and liquid.
5. Housing and Urban Development Corporation (HUDCO)
In the past, HUDCO bonds have been issued, which are long-term and tax-exempt, primarily to finance infrastructure and housing development. HUDCO is expected to issue new bonds for affordable housing projects.
6. NTPC Limited
NTPC, the biggest power-generating group in India, could also convert its renewable energy and infrastructure development by issuing tax-free bonds. NTPC bonds have always been attractive due to the organisation’s great creditworthiness.
Where to Buy Tax-Free Bonds?
Tax-free bonds may be bought in one of the following ways:
- New public issues upon announcement (communicating through NSE or BSE)
- Secondary markets: Tax-free bonds that have been previously issued are normally traded at secondary markets
- New concerns can be applied through a demat account, net banking, or in the form of a PSU issuing the issue.
When buying in the secondary market, ensure you consider the price without accrued interest (clean price) and the yield on the bond’s interest. It is essential to note that prices fluctuate in response to market interest rates.
Conclusion
India tax-free bonds present investors with an exceptionally safe, relatively secure, and tax-efficient investment option. Investors should stay informed about announcements from other entities, such as NHAI, IRFC, PFC, and REC, which are likely to be made this year, as more of their PSUs are expected to issue bonds.
Tax-free bonds are a dependable and worry-free type of investment, whether you want to retire, save wealth, or get a tax-free investment. Check the bond credit rating, coupon rate, and tenure of investment before making a decision.
