Tax-free bonds in India
Tax-free bonds are about as close as Indian fixed income gets to a free lunch: the interest they pay is fully exempt from income tax — no TDS, no slab, no upper limit — under Section 10(15)(iv)(h) of the Income Tax Act. The catch is that you cannot buy a new one. Government-backed issuers like NHAI, IRFC, PFC, REC and HUDCO raised this money between 2012 and early 2016, and none have been issued since. Today the only way in is to buy an existing bond from another investor on the stock exchange, where they trade at a premium — so the yield you actually earn (roughly 5–5.5% tax-free as of July 2026) is well below the 7.5–9% coupon printed on the bond. This guide covers what is exempt (and what is not — your capital gain on sale is still taxed), who the issuers are, the yield you would really pocket, why that tax-free income is worth far more to a 30%-bracket investor than the headline number suggests, and how to buy on the exchange without getting caught out by thin liquidity.
What a tax-free bond actually is — and what "tax-free" does not cover
A tax-free bond is a bond issued by a government-owned company where the annual interest (the coupon) is exempt from income tax under Section 10(15)(iv)(h) of the Income Tax Act. You lend the issuer money, it pays you interest once a year, and it returns the face value at maturity — just like any other bond. The difference is the interest: it is exempt at any amount, no TDS is deducted, and it is not added to your taxable income. You still disclose it in your return, but under 'exempt income', not as taxable interest.
This is a genuinely rare tax break, and it is often confused with two other things that sound similar. Tax-free bonds (Section 10(15)) exempt the interest you earn. Tax-saving infrastructure bonds under the old Section 80CCF gave a deduction on the amount you invested — that scheme was discontinued years ago. And 54EC capital-gain bonds (from REC, PFC, IRFC etc.) give you a deduction on a property or asset capital gain if you reinvest it — the interest on those is fully taxable. If your goal is to shelter a capital gain rather than earn tax-free income, see the separate 54EC guide.
The single most important caveat: only the interest is tax-free. If you sell the bond on the exchange for more than you paid, that profit is a capital gain and it is taxable in the normal way (see the table below). There is also no deduction for buying a tax-free bond — the amount you invest does not reduce your taxable income. So 'tax-free' means 'tax-free coupon', not 'tax-free investment'.
| What happens | Tax treatment |
|---|---|
| Annual interest (coupon) you receive | Fully exempt under Sec 10(15)(iv)(h); no TDS; no limit |
| You sell on the exchange above your cost, held over 12 months | Long-term capital gain, taxed at 12.5% (no indexation) |
| You sell on the exchange above your cost, held 12 months or less | Short-term capital gain, taxed at your income-tax slab |
| The amount you invest | No deduction — not an 80C / 80CCF instrument |
| Bond redeemed at face value on maturity | No gain if you bought near par; otherwise capital-gain rules apply |
Capital-gains rules per the Income Tax Act as amended by Budget 2024 (effective 23 July 2024): listed securities LTCG holding period is 12 months, LTCG rate 12.5% without indexation. Confirmed against ClearTax and GripInvest bond-taxation guides, as of 9 July 2026. This is general information, not tax advice — check your own case with a professional.
Why you can't buy a new one — and where that leaves you
Tax-free bonds were issued in tranches roughly from FY2011-12 to FY2015-16 to fund infrastructure — highways, railways, power and urban housing. The government stopped authorising fresh issues after the 2015-16 round, so the last of them came to market in early 2016. The reason was cost: a tax-free coupon is effectively a subsidy that is worth the most to the highest earners, and the exchequer decided it was too expensive. There has been no new tax-free bond issuance in India since.
The bonds still in the market were long-dated — mostly 10, 15 and 20-year paper — so a good number are still alive, with remaining maturities running from around 2026 out to the mid-2030s. As each one matures, the pool shrinks. This is a slowly disappearing asset class, not a growing one.
Because the primary market is closed, the only way to buy is the secondary market: on the NSE or BSE cash segment through any broker, or via a bond platform (GoldenPi, IndiaBonds, Wint Wealth) that sources the same bonds from the exchange or from dealers. There is no lock-in — you can sell whenever you find a buyer — but liquidity is thin, which matters a lot (see 'How to buy' below). For the mechanics of holding and trading bonds generally, see how to invest in bonds; for the wider menu of sovereign options, see government bonds in India.
The big issuers
Every tax-free bond issuer is a government-owned entity, and almost all outstanding issues carry the top AAA rating from CRISIL, CARE or ICRA. Credit risk is minimal — these are effectively quasi-sovereign. The differences between issuers are mostly about which bond has the maturity you want and, crucially, which one you can actually buy at a decent yield on the day.
The best-known issuers are NHAI (highways), IRFC (Indian Railways), PFC and REC (power sector lending and rural electrification), HUDCO (urban housing and infrastructure) and NABARD (agriculture and rural development). NHB (National Housing Bank), NTPC, IIFCL and IREDA also issued tax-free paper. Do not shop by issuer or by the coupon on the certificate — shop by the yield-to-maturity you would actually earn at today's price for a maturity you are happy to hold to (explained next).
| Issuer (all government-owned) | What it funds | Rating | Example listed tax-free bond | Indicative YTM* |
|---|---|---|---|---|
| NHAI | National highways | AAA | Coupons ~7.6–8.3%, maturities to ~2031 | ~5.2–5.6% |
| IRFC | Indian Railways rolling stock | AAA | 7.34% coupon, matures Feb 2028 | ~5.2–5.3% |
| PFC | Lending to power projects | AAA | Coupons ~8.2–8.9%, maturities to ~2028 | ~5.3–5.5% |
| REC | Rural electrification / power | AAA | 8.12% (Mar 2027); 8.63% (Mar 2029) | ~5.2–5.4% |
| HUDCO | Urban housing & infrastructure | AAA | 8.20% (Mar 2027); 8.51% (Oct 2028) | ~5.3–5.5% |
| NABARD | Agriculture & rural development | AAA | Tax-free bonds maturing ~2029–2031 | ~5.3–5.6% |
*Indicative yield-to-maturity, tax-free. Coupons and YTMs from live IndiaBonds and Wint Wealth secondary-market listings, cross-checked against ClearTax, as of 9 July 2026. NHB (e.g. 9.01% coupon, Jan 2034), NTPC, IIFCL and IREDA also issued tax-free bonds. YTM moves with market price every day — confirm the exact figure for a specific ISIN on NSE/BSE or your bond platform before buying.
The coupon is not your yield — what you'll actually earn
This is the part most first-time buyers get wrong. A tax-free bond might say '8.5%' on it, and that coupon is paid on the ₹1,000 face value — but you are not buying it for ₹1,000. Because these bonds pay a fat, tax-free coupon and no more are being made, buyers have bid the prices up to a premium. If you pay, say, ₹1,180 for that ₹1,000 face-value bond, you still only get ₹85 of interest a year and you only get ₹1,000 back at maturity — so your true return, the yield-to-maturity (YTM), is far below 8.5%.
Two forces pushed yields down. Market interest rates fell after these bonds were issued, which lifts the price of any existing fixed-rate bond. And steady demand from high-tax-bracket investors — the people this coupon is worth the most to — keeps the premium high. The net effect: as of early-to-mid July 2026, secondary-market YTMs on the more liquid tax-free bonds were clustered around 5.2%–5.5% tax-free, with the longest-dated bonds a touch higher. Treat that as a live number and check it yourself — YTM changes every day with the price.
Around 5.2–5.5% sounds unremarkable next to a bank FD or the RBI Floating Rate Savings Bond at 8.05%. But those are pre-tax numbers and a tax-free bond's yield is post-tax. Comparing them fairly means grossing the tax-free yield up to its pre-tax equivalent — which is where the appeal really is, for the right investor.
One practical note: when you buy a bond between its annual coupon dates you also pay the seller the interest accrued since the last coupon (the 'dirty price'). You are made whole when the full coupon lands, and that coupon is still tax-free — but the accrued-interest line can make the cash outlay look higher than the quoted price.
Why a tax-free coupon is worth more to a high-tax-bracket investor
To compare a tax-free bond against a taxable FD or bond, gross the tax-free yield up to what a taxable instrument would have to pay to leave you with the same money after tax. The formula is simple:
Taxable-equivalent yield = tax-free yield ÷ (1 − your marginal tax rate, including cess).
Take a 5.5% tax-free bond. For someone in the 30% slab, the marginal rate including 4% cess is 31.2%, so the equivalent pre-tax yield is 5.5 ÷ (1 − 0.312) = about 8.0%. In other words, that 'modest' 5.5% tax-free bond is doing the job of an 8% FD — and there is no 8% AAA FD around. The higher your bracket, the bigger the gap; the lower your bracket, the smaller it gets, until for someone below the taxable limit the tax-free wrapper is worth nothing and a plain FD wins on the headline rate alone.
The verdict falls straight out of the table: tax-free bonds are a high-earner instrument. If you are in the 30% bracket (or paying surcharge on top), they are genuinely attractive. If you are in the 5% or 10% bracket, or you pay no tax, you are better off in an FD or the RBI Floating Rate Savings Bond.
| Your tax bracket | Marginal rate incl. 4% cess | Pre-tax yield needed to match 5.5% tax-free |
|---|---|---|
| 5% slab | 5.2% | 5.80% |
| 20% slab | 20.8% | 6.94% |
| 30% slab | 31.2% | 7.99% |
| 30% + surcharge (₹50L–₹1cr income) | 34.32% | 8.37% |
| Top marginal rate (income above ₹2cr) | 39.00% | 9.02% |
Illustration using a 5.5% tax-free YTM and the formula tax-free yield ÷ (1 − marginal rate). Marginal rates include 4% health & education cess; the 39% figure is the new-regime cap (surcharge capped at 25%); old-regime ultra-high earners can face ~42.7%, needing ~9.6% pre-tax. Swap in the live YTM of the specific bond to redo the maths. As of 9 July 2026.
How to buy on the exchange — and the liquidity trap
Buying is mechanically the same as buying a share. You need a demat and trading account (see how to invest in bonds if you are setting one up). Find the bond by its ISIN — search the issuer on NSE or BSE, note the ISIN of the specific maturity you want, and place a limit order in the cash segment. It settles into your demat like any equity trade, and the annual coupon is credited to your demat-linked bank account. Alternatively, bond platforms such as GoldenPi, IndiaBonds and Wint Wealth list the same bonds and handle the plumbing for you — just check whether their price embeds a markup versus the raw exchange quote.
The real hazard is liquidity, not credit. Many tax-free ISINs trade only a handful of times a week, and some barely trade at all. That means wide bid-ask spreads, prices that can jump on a single trade, and no guarantee you can buy (or later sell) the quantity you want at a fair yield. Protect yourself: always use a limit order, never a market order; check the last-traded price and the implied YTM before you bid; and be ready to buy a different but similar AAA issuer if your first choice is dry that day.
A few practicalities. Face value is typically ₹1,000 per bond and you can buy a single bond, but odd lots can be hard to resell. Keep your PAN and bank details updated with the depository so the coupon reaches you. And treat these as buy-and-hold to maturity: the tax-free math works over the full holding period, and thin liquidity makes them a poor choice for money you might need back in a hurry.
Are tax-free bonds right for you?
Tax-free bonds suit one profile well: a high-bracket investor (30% or paying surcharge) who wants safe, predictable, tax-free income, is happy to lock money away for years, and will hold to maturity. For that person, ~5.5% tax-free ≈ 8% pre-tax from a AAA quasi-sovereign issuer is hard to beat, and the coupon is genuinely hands-off — nothing to reinvest, nothing to report as taxable.
They are a poor fit for anyone below roughly the 20% slab (a bank FD or the RBI Floating Rate Savings Bond at 8.05% gives more after tax), and for anyone who might need the money soon (liquidity is thin). Compared with the RBI Floating Rate Savings Bond, tax-free bonds are tradable and fixed-rate, whereas the RBI bond is a locked-in floating-rate instrument taxed at your slab — for a 30% investor the two land at a broadly similar post-tax return today, so the choice comes down to whether you value the fixed rate and exchange tradability or the sovereign simplicity.
If you want higher yields and can accept more risk and full taxation, corporate bonds pay more but are taxable and carry real credit risk. And remember the one rule that trips people up here: the interest is tax-free, but any capital gain when you sell is not — so if you buy at a premium and sell before maturity, run the after-tax numbers, not just the yield.
- https://cleartax.in/s/tax-free-bonds
- https://www.indiabonds.com/explore/tax-free-bonds/
- https://www.wintwealth.com/bonds/tax-free-bonds/
- https://cleartax.in/s/tax-on-bonds
- https://www.gripinvest.in/blog/taxation-on-bonds
- https://www.jiraaf.com/blogs/bond-insights/tax-free-bonds-india
- https://www.dezerv.in/bonds/tax-free-bonds/
- https://incometaxindia.gov.in/Pages/utilities/Tax-Free-bonds-or-Certificates.aspx
Frequently asked
What people ask about tax-free bonds in india.
The interest is genuinely tax-free — it is exempt under Section 10(15)(iv)(h), no TDS is deducted, and there is no upper limit; you just report it as exempt income. But 'tax-free' applies only to the interest. If you sell the bond on the exchange for more than you paid, that capital gain is taxable (12.5% LTCG without indexation if held over 12 months, otherwise at your slab), and there is no deduction for the amount you invest.
Not new ones — no tax-free bonds have been issued in India since early 2016, so the primary market is closed. You can only buy existing bonds on the secondary market: on the NSE or BSE through any broker with a demat account, or via a bond platform like GoldenPi, IndiaBonds or Wint Wealth. There is no lock-in, but trading volumes are thin, so use limit orders and check the yield before you buy.
As of early-to-mid July 2026, indicative secondary-market yields-to-maturity on the more liquid tax-free bonds were clustered around 5.2%–5.5% tax-free — verify the live figure for the specific ISIN before buying. The 7.5–9% coupon on the certificate is not your return, because the bonds trade at a premium to face value. For a 30%-slab investor, a 5.5% tax-free yield is worth about 8% pre-tax.
The interest stays exempt, but a gain on sale is taxable. For a listed tax-free bond under the rules effective 23 July 2024: if you held it for more than 12 months, the profit is a long-term capital gain taxed at 12.5% without indexation; if 12 months or less, it is a short-term capital gain taxed at your income-tax slab. If you simply hold to maturity and bought near par, there is usually no capital gain.
Safety is not really the differentiator — every issuer (NHAI, IRFC, PFC, REC, HUDCO, NABARD, NHB, NTPC) is government-owned and rated AAA, so credit risk is minimal across the board. The 'best' one is whichever offers the highest yield-to-maturity for a maturity you are willing to hold to, and which is actually liquid enough to buy that day. Compare live YTMs, not the coupons printed on the bonds.
It depends on your tax bracket. For a 30%-slab investor, a ~5.5% tax-free yield is equivalent to roughly 8% pre-tax, which beats a typical AAA bank FD at around 7% after tax. But if you are in the 5% or 10% bracket or pay no tax, the tax-free wrapper is worth little and an FD — or the RBI Floating Rate Savings Bond at 8.05% — usually gives you more. FDs are also far more liquid than these thinly traded bonds.