Tax free bondsAdvantages and disadvantages
Advantages:
Tax-exemption
AThe interest income from tax-free bonds is completely exempt from taxes. These bonds are exempt from tax deducted at source (TDS), as well.
Interest
Given that the interest on these bonds is not subject to taxes, the rate of interest given on tax-free bonds typically ranges from 5.50% to 9% which is quite appealing. Investing in tax- free bonds at the present yields might earn you upto 6% return that is not subject to taxation.
Zero Default Risk
Public sector organizations issue bonds that are exempt from taxes. As a result, unlike other bonds, tax-free bonds are exceptionally safe and have no default risk.
Long-Term Lock-in Period:
The lock-in term for tax-free bonds spans from 10 to 20 years or more, making them appropriate for investors with a lengthy investment horizon..
Disadvantages :
Low Liquidity
Despite being listed on stock exchanges, tax-free Bonds have a low level of liquidity.
Can use as collateral
Bonds such as sovereign gold bonds and other types
Of bonds may be maintained as security for debts. However, banks do not recognise tax-free bonds as loan collateral. As a result, investors are unable to use them as collateral for loans.
