How much can you invest in tax-free bonds and tax-saving bonds?

A retail investor can invest up to ₹5 lakh in a tax-free bond. However, there is no criteria or limit of investment in tax-saving bonds in India.

How to buy tax-free bonds in India?

You can buy tax-free bonds during a bond public issue when the bond first enters the market. Additionally, you can buy the bond using your demat account as these are tradable in the secondary market and listed on stock exchanges in India.

Best Tax-free Bonds in India

Subhodip Das

Author Updated on Apr 12, 2025

Share on:

If you want to reduce your tax liability while having a high tax bracket, you can invest in some of the best tax-free bonds in India. These bonds help you earn tax-free interest as regular income semi-annually or annually. Learn about these bonds in detail here to make an informed purchase decision.

Top Tax-free Bonds in India

Here are some of the best tax-free bonds in India in 2024:

Issuer	Coupon Rate (Interest Rate)	Maturity Date
National Highways Authority of India	8.75%	5th February 2029
National Housing Bank	9.10%	16th November 2033
NTPC Limited	8.91%	16th November 2033
Rural Electrification Corporate Limited	8.71%	24th September 2028
Housing and Urban Development Corporation	7.64%	8th February 2032
Indian Railways Corporation Limited	8.63%	26th March 2029
Power Finance Corporation Limited	8.67%	16th November 2033

Who Should Invest in High-return Tax-free Bonds?

Here are the categories of investors who can invest in some of the best tax-free bonds in India:

Risk Averse Investors

Conservative investors with a low-risk appetite can invest in these bonds. This ensures capital protection, a stable income and high returns.

High-Income Individuals

High-income individuals are in a high tax bracket. However, if they want to reduce their tax liability with regular income, they can invest in tax-free bonds. Interest income from these bonds is completely tax-free.

Investors with Long-term Financial Goals

If you have a long-term financial goal ranging between 10 years to 20 years, you can invest in tax-free bonds. The tenure of these bonds usually lies in the range mentioned above.

How Do Tax-Free Bonds Work?

Issuing authorities of tax-free bonds raise funds by issuing bonds to investors. These government-backed issuing authorities use the funds collected for infrastructure, power and housing projects. In turn, they provide interest to the investors.

The interest earned from these bonds is tax-free. Further, investors receive their principal amount on maturity of the bond. As these bonds are listed on Indian stock exchanges, investors can sell them before maturity.

How to Apply for Tax-free Bonds?

Here are the steps to apply for tax-free bonds in India:

Step 1: Choose a tax-free bond based on its interest rate, issuer, tenure and credit rating.

Step 2: Check the eligibility criteria, such as age.

Step 3: If you do not have a demat account, you need to open one with your preferred depository participant.

Step 4: Transfer your purchase amount from your savings account to your demat account.

Step 5: Apply for the bond of your choice.

Step 6: Once the bonds are allotted, you can track the same using your demat account.

Step 7: You can check your demat account semi-annually or annually for interest credits.

Credit Rating of Tax-free Bonds

Here are the credit ratings of bonds:

Credit Rating	Investment Type	Risk Level
AAA	Highly Safe	Lowest credit risk
AA-, AA, AA+	Considerably Safe	Very low credit risk
A-, A, A+	Adequately Safe	Low credit risk
BBB-, BBB, BBB+	Moderately Safe	Moderate credit risk
BB	Moderately Safe	Moderate risk
B-, B, B+	Less Safe	High risk of default
C	Less Safe	Very high risk of default
D	Unsafe	In default or expected to default

Things to Consider Before Investing in High-Return Tax-free Bonds

Consider the following things before you invest in one of the best tax-free bonds in India:

Tenure: Ensure you are looking for long-term financial goals, as the tenure of these bonds ranges between 10 to 20 years.
Interest Rates: Compare the interest rate (coupon rate) with other fixed-income investment options.
Tax Bracket: As these bonds are suitable for high-income groups, check your tax bracket before you invest.
Liquidity Needs: These bonds offer limited liquidity as they have a maturity period. However, you can sell these bonds on the stock exchange before maturity. Consider this liquidity framework before you invest in such a bond.

Advantages of Tax-free Bonds

The following are the advantages of tax-free bonds:

Tax-free Income: The interest income on these bonds is tax-free.
Safety: As the issuing authorities are government entities, the bonds are safe investment options.
Stable Returns: The interest rates are predetermined. As a result, investors can earn stable returns.
Trading Opportunity: As these bonds are listed in the Indian stock exchanges, you can sell them before maturity.

Difference Between Tax-savings Bonds and Tax-free Bonds

Here are the differences between tax-saving bonds and tax-free bonds:

Tax-saving Bonds	Tax-free Bonds
The principal amount is tax exempted.	The interest income is tax-free.
The tax exemption applies under Section 80CCF of the Income Tax Act.	The tax exemption applies under Section 10 of the Income Tax Act.
The maximum tax exemption allowed during a financial year is ₹20,000.	Investors can invest a maximum of ₹5 lakhs in a financial year.
These bonds are redeemable after 5 to 7 years as they have a repurchase contract.	The maturity period of these bonds is 10 to 20 years.

The Bottom LineSome of the best tax-free bonds in India have the best credit rating, making them a low-risk and safe investment option. You can invest in one of these bonds to earn interest and reduce your tax liability if you have a higher tax bracket. However, make sure to consider the tenure, issuer, coupon rate and credit rating before you invest in such bonds.