TAX FREE BONDS
Bonds form the part of “Debt” as an asset class. This implies that the investor has given a loan to the issuing entity, and will be repaid at the end of the tenure as specified.
Tax free bonds have emerged as highly popular investment option among investors due to the taxation benefit that they offer. These bonds, generally issued by government backed entities, are exempt from taxation on the interest income received from such instruments under the Income Tax Act, 1961. However these bonds do not offer any additional taxation benefits under section 80CCF of Income Tax Act, 1961.
Tax-exempt bonds usually pay lower coupons than corporate bonds as they enjoy a better credit rating and the interest received is tax-free, thus after-tax returns work out to be higher for the tax-exempt bond.