Federal income from state, city, and local government bonds (municipal bonds, or munis) is normally tax-free. However, you must record this income when you file your taxes.
In most cases, municipal bond income is tax-free in the state where the bond was issued. However, take in mind the following:
- Occasionally, a state that normally taxes municipal bond interest would exempt special bonds when they are issued.
Municipal bond income may potentially be free from local taxes, depending on your state’s regulations. For further information on the rules in your state, see a tax advisor.
What bonds are exempt from taxes?
Tax-exempt municipal bonds are divided into two categories based on how the money borrowed is repaid: general obligation bonds and revenue bonds. Bonds, notes, leases, bond funds, mutual funds, trusts, and life insurance are among the tax-exempt investment vehicles.
Are there any bonds that are tax-free?
A government entity issues tax-free bonds to raise revenue for a specific purpose. Municipal bonds, for example, are a type of bond issued by municipalities. They have a fixed rate of interest and rarely default, making them a low-risk investment option.
The most appealing aspect, as the name implies, is the absolute tax exemption on interest under Section 10 of the Income Tax Act of India, 1961. Tax-free bonds often have a ten-year or longer maturity period. The money raised from these bonds is invested in infrastructure and housing initiatives by the government.
What bonds aren’t tax-free?
Zero-coupon municipal bonds are not taxed because they are purchased at a discount because they do not pay interest or coupons.
What exactly are IRFC tax-free bonds?
After a hiatus, the Indian Railways Finance Corporation (IRFC) will launch its fourth tax-free bond offering of 2015 on Tuesday. The offer, which has been awarded the highest AAA rating by credit rating agencies, is raising 4,532 crore for IRFC, the finance arm of Indian Railways.
Retail investors (those who invest less than ten lakh rupees) would receive 40% of the issuance.
The issue will expire on December 21, however it may close sooner if it is fully subscribed.
Possibility of signing up on the first day Based on previous years’ experiences, the issue may be oversubscribed on the day of its release. The bonds will be distributed according to the order in which they are received. The minimum investment is $5,000 ($1,000 divided by five bonds).
Retail investors can get 7.32 percent on 10-year bonds, 7.53 percent on 15-year bonds, and 7.5 percent on 20-year bonds from the IRFC. Across tenures, other investors will receive 0.25 percentage points less. Interest will be paid out on a yearly basis and is tax-free.
The tax-free bond rates given by IRFC are greater than those offered by REC in its previous offering. This is because the G-Sec yield, which is related to the rates of tax-free bond offerings, has risen in the last month.
This is in expectation of the US Federal Reserve boosting interest rates at its next meeting. However, after the uncertainty around the US Fed rate hike has passed, the G-Sec yield in India may drop in the coming week as the domestic economy improves. As a result, rather than waiting for future bond issuance, it makes sense to invest in IRFC’s bonds.
It’s good for a slab that’s worth 20% or more. The bonds are available to investors in higher tax brackets looking for safe, long-term investments. One, the ‘AAA’ rating denotes the highest level of safety. Next, bonds outperform bank deposits, which at best provide around 6% post-tax returns for investors in the 30% tax band and roughly 7% for those in the 20% tax bracket. However, investors in the 10% tax bracket should avoid the IRFC bond because bank deposits may still provide greater post-tax returns.
Those in higher tax brackets might opt for IRFC’s 15-year bond, which has the highest interest rate (7.53 per cent for retail investors). This rate is identical to the high rate offered by NTPC’s first tax-free bond sale this year.
But first, set aside $1.5 lakh to invest in a PPF, which pays a better 8.7% tax-free return compounded annually and also qualifies for a Section 80C tax deduction (unlike tax-free bonds).
NHAI or REC: which bond is better?
REC bonds have a somewhat higher rating than NHAI bonds. Because NHAI bondholders must request for surrender of bonds at maturity, which is after 5 years, and only then is the maturity amount redeemed and paid by cheque or ECS. It will be automatically redeemed and paid by check or ECS in the case of REC bonds.
Are municipal bonds in California tax-free?
- Tax-exempt status The majority of California municipal bonds are tax-exempt, while some specialized bonds are not (all are exempt from State of California personal income taxation for California residents, however). The designation of a bond as a “tax-exempt California municipal bond” is contingent on the bond issue’s intended purpose.
- California municipal bonds provide a consistent and regular stream of interest payments that are normally tax-free at both the federal and state levels. One reason why some investors use California municipal bonds as part of a diversified investment portfolio is because of the consistent dividend stream.
- Support California’s infrastructure In addition to the possible financial rewards, purchasing California bonds helps to fund the construction and upkeep of the state’s infrastructure, thereby increasing the state’s quality of life.
How do I go about purchasing tax-free bonds?
These tax-free bonds are available in both physical and demat form to investors. The subscription period for tax-free bonds is open for a limited time, and you must purchase these bonds within that time frame. If the bonds are purchased in tangible form, the investor must provide his or her Permanent Account Number (PAN).