Best Tax-Free Bonds to Invest in India

Created on 07 Sep 2021

Wraps up in 4 Min

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Updated on 28 Oct 2023

What if we said you could have humble returns, liquidity, and zero taxability in a single instrument? That, too, is at a very low risk. Yes? Well, this blog is a must-read for you!

From regular returns to capital gains, types of investment avenues are abundant! But for rational investors willing to maximize their profits, the rate of return is not the only deciding factor. In fact, what matters a lot is the cost the investor has to bear because a dent in the returns would just not be feasible. That’s why people look out for low-risk investments with zero tax implications. One such investment avenue is a Tax-free Bond.

In the crazy rush behind stocks and cryptos, people often tend to ignore simple yet effective asset classes available at their disposal. So, if you are someone unaware of one such asset class, here’s your guide to Tax-free Bonds in India.

What are Tax-free Bonds?

As the name suggests, there is zero tax chargeable on these bonds. These are issued by the government, and hence, are less risky. They offer a fixed rate of interest which is non-taxable. These interest payments are usually on an annual basis.

One thing to keep in mind about tax-free bonds is that interest income earned is exempted from tax. But any capital gains from the sale in the secondary market are taxable.

In terms of Investment, tax-free bonds are similar to fixed  deposits as a lump sum amount is invested in the beginning, and then a fixed amount of interest is received each year and the principal amount at maturity.

These bonds are usually preferred by individuals who lie in the high-income bracket to save taxes on their income, such as high-net-worth individuals, HUF members, trusts, cooperative banks, and qualified institutional investors.

Features of Tax-free bonds

These bonds are exempted from tax, with low chances of non-payment because the government issues them. However, they are not highly liquid and have a long lock-in period. The typical tenure of tax-free bonds is 10 to 15 years and sometimes 20 years.

These can be issued in Demat format or physical form or bought from the secondary market for short-term investment purposes.

Many PSUs, such as the Indian Renewable Energy Development Agency, National Highway Authority of India, Rural Electrification Corporation, Power Finance Corporation, Housing and Urban Development Corporation, Indian Railways, and NTPC Limited, have issued such bonds.

How to select the best Tax-free bonds?

  • One needs to look at yield till maturity (YTM) for selecting any tax-free bond. YTM is the total annual return anticipated on a bond if the bond is held until it matures.

  • Apart from this, it is to be checked if it is liquid, i.e., whether it is traded in the secondary market or not. 

  • Before making a purchase, one should always check the authenticity of the issuing organization.

  • One also needs to check the lock-in period and select the one with a lower lock-in period.

  • Also, consider the ratings given to these bonds by credit rating agencies.

Now that you know what to look out for in a Tax-free bond, let's see which are the best five tax-free bonds to invest in India.

Top 5 Tax-Free Bonds in India

Based on the conditions stated above, we have shortlisted the top 5 tax-free bonds in India:

1. NHAI Tax free bonds

These bonds are issued by the National Highway Authority of India. NHAI is a Ministry of Road Transport and Highways nodal agency and headquartered in New Delhi. Its bond has received an AAA rating from India’s top credit rating agencies, including Crisil, CARE, and Brickwork. Currently, the interest rate paid by this bond is 8.75%. At the same time, it has a YTM of 4.71%.

2. IRFC Tax-free bonds

This is the institution formed by the government for the development of the railway sector of the country. India's Top rating agencies have assigned the highest rating of AAA to the bonds issued by the Indian Railway Finance Corporation (IRFC). The interest rate provided by these bonds is around 7.53%. It has a face value of ₹1,000. Its YTM is 4.82%.

3. PFC Tax-free bonds

Power Finance Corporation is a publicly listed government company that provides a complete range of financial products and related consulting services (from project conception to post-commissioning) to clients in the power sector. Because of its concentration on the power sector, it receives substantial financial aid. The PFC’s tax-free debt instruments provide around an 8.2% interest rate to the investors. The YTM is around 4.21%. Both Crisil and ICRA have assigned AAA ratings to these debt instruments.

4. IIFCL Tax-free bonds

India Infrastructure Finance Company Ltd (IIFCL) is wholly owned by the government of India and was established to provide financial assistance to the infrastructural projects going on in the country. The interest rate offered on IIFCL tax-free bonds is 8.11%. At the same time, the YTM is 5.83%. These bonds are being affirmed with an AAA rating by India Ratings.

5. HUDCO Tax-free bonds

Housing and Urban Development Corporation is wholly owned by the government of the country and was established to offer long-term financing for the building of residential homes, as well as to finance or undertake the establishment of new or satellite cities in whole or in part. The interest rate provided by these HUDCO tax-free bonds is 8.2%. At the same time, the YTM is 4.59%. ICRA and India Ratings have assigned these tax-free bonds an AAA rating. 


As we said earlier, returns are not the sole deciding factor for everyone. A slight dent in the earnings is a big matter for retail investors, and to counter that, avenues like Tax-free bonds come into play.

If you are someone with taxable income and wish to earn more without having to shell out more of your earnings in the form of taxes, these instruments are definitely worth a try. What say?

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.

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Kanishka Tayal

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Kanishka is a finance enthusiast, currently pursuing her master's in Banking and financial services domain. She loves to doodle in her spare time. She is a keen learner and is willing to pursue her career as a financial analyst.

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