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Tax Free bonds after Budget 2014

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Tax Free bonds after Budget 2014

The change proposed in the Budget only applies to mutual funds. Capital gains from tax-free bonds listed on the exchanges are still eligible for treatment as long-term gains after a year. Since there is no indexation available here, you can pay 10% capital gains tax. The bonds issued by high-quality companies like the SBI are quoting above 9% yield and may appreciate if interest rates are cut. However, note that the interest earned here is taxable at marginal rates and, therefore, this option is good only for someone in the lower tax brackets. Investors in the high income brackets can consider tax-free bonds.


The issuers are highly rated PSUs, so they are very safe. Besides, there is no put or call option here, so you can safely lock in funds for the long term. Bond prices have jumped 14% in the past six months, bringing down their yields to around 8% (see table). The effective yield works out to 12.12% for someone in the highest 30.9% tax bracket.

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