In the current market environment, where volatility and taxation eat into investment returns, tax-free bonds offer a rare combination of guaranteed returns, zero tax on interest, and low risk — making them a favorite for conservative and high-net-worth investors alike.
This 2025 guide explores the world of tax-free bonds in India, including how they work, the latest options, key features, pros and cons, and how to invest in them smartly.
📌 What Are Tax-Free Bonds?
Tax-free bonds are long-term debt instruments issued by government-backed public sector undertakings (PSUs). The interest earned on these bonds is completely exempt from income tax under Section 10(15)(iv)(h) of the Income Tax Act, 1961.
🧾 Quick Facts:
| Feature | Details |
|---|---|
| Tenure | 10, 15, or 20 years |
| Tax on Interest | Nil (fully tax-free) |
| Issuers | Government-backed PSUs |
| Returns (2025) | 5.5% to 6.5% annually |
| Credit Rating | AAA (most cases) |
| Liquidity | Listed on stock exchanges (secondary market) |
| Investment Mode | Primarily through demat account |
🏦 Top Issuers of Tax-Free Bonds in India
Though fresh tax-free bonds haven’t been issued since 2016 due to government policy, several existing bonds are still available in the secondary market on NSE and BSE.
Here are the top government entities that have issued tax-free bonds:
| Issuer Name | Sector |
|---|---|
| National Highways Authority of India (NHAI) | Infrastructure |
| Indian Railway Finance Corporation (IRFC) | Railways financing |
| Power Finance Corporation (PFC) | Power infrastructure |
| Rural Electrification Corporation (REC) | Rural power financing |
| Housing and Urban Development Corporation (HUDCO) | Housing |
| NTPC Limited | Power generation |
🔍 Are Tax-Free Bonds Still Available in 2025?
❗ No new tax-free bonds have been issued since FY 2016–17.
However, many of these bonds are still trading on the secondary market (NSE/BSE). Investors can purchase them via a demat account just like regular stocks or corporate bonds.
💡 These are ideal for long-term fixed income investors looking for post-tax yields better than FDs or taxable bonds.
📈 Current Tax-Free Bond Yields – 2025
While the original interest rates on older bonds were 6.5% to 7.5%, current market yield-to-maturity (YTM) has dropped due to high demand.
Here’s a snapshot of popular tax-free bonds trading on NSE/BSE in 2025:
| Bond Name | Coupon Rate | Maturity | Face Value | Market Price (approx) | YTM (2025) |
|---|---|---|---|---|---|
| NHAI 2027 | 7.35% | 2027 | ₹1,000 | ₹1,090 – ₹1,120 | ~5.70% |
| IRFC 2028 | 7.12% | 2028 | ₹1,000 | ₹1,085 – ₹1,100 | ~5.80% |
| PFC 2030 | 7.25% | 2030 | ₹1,000 | ₹1,120 – ₹1,140 | ~6.00% |
| HUDCO 2032 | 7.27% | 2032 | ₹1,000 | ₹1,130 – ₹1,150 | ~6.10% |
Note: Prices fluctuate based on demand and interest rate environment. Lower yield means you pay a premium now for future interest.
🧠 Who Should Invest in Tax-Free Bonds?
These bonds are best suited for:
- Retirees and senior citizens seeking fixed tax-free income
- HNIs and salaried professionals in the 30% tax bracket
- Risk-averse investors looking for government-backed, long-term options
- Diversified portfolios that include safe debt instruments
📊 Tax-Free Bonds vs Fixed Deposits vs Debt Mutual Funds
| Feature | Tax-Free Bonds | Fixed Deposits | Debt Mutual Funds |
|---|---|---|---|
| Interest Rate | 5.5–6.5% (tax-free) | 6–7.5% (taxable) | 6–8% (taxable) |
| Tax Treatment | No tax on interest | Interest taxed as per slab | Capital gains tax |
| Risk Level | Very low | Low | Medium |
| Liquidity | Medium (via exchange) | Low (penalty on exit) | High (open-ended) |
| Tenure | Long (10–20 years) | Flexible | Flexible |
Effective post-tax returns for high tax-bracket investors are much better in tax-free bonds.
💡 Advantages of Tax-Free Bonds
- ✅ 100% tax-exempt interest income
- ✅ AAA-rated and government-backed issuers
- ✅ Low risk of default
- ✅ Ideal for passive long-term income
- ✅ Tradable on stock markets (NSE/BSE)
❌ Disadvantages and Risks
| Drawback | Details |
|---|---|
| Limited liquidity | Not as easy to sell in large volumes |
| Price fluctuations | Market price depends on interest rate trends |
| No capital appreciation | Meant for income, not growth |
| Long tenure | Funds are locked unless sold on exchange |
| No compounding | Interest is paid annually, not reinvested |
🔄 How to Invest in Tax-Free Bonds in 2025
Since there are no fresh issuances, you can invest only via the secondary market.
✅ Steps:
- Open a Demat and Trading Account (if not already)
- Search for listed tax-free bonds (NSE/BSE under Debt Instruments)
- Place buy orders just like for shares
- Hold in demat form and receive annual interest directly in your bank account
💡 Use platforms like Zerodha, Groww, HDFC Securities, ICICI Direct, and Axis Direct to search and invest in these bonds.
🧾 Example: Income from a Tax-Free Bond
Investment: ₹10 lakhs in NHAI 7.35% tax-free bond
Annual Income: ₹73,500
Tax Outgo: ₹0
Effective Post-Tax Yield (if in 30% slab): ~10.5% (FD equivalent)
📉 When to Avoid Tax-Free Bonds?
- If you’re in the lowest tax slab or don’t pay tax, taxable bonds or FDs may offer better yields.
- If you need liquidity or short-term access to funds, debt funds or bank RDs are more suitable.
- If you’re looking for capital growth, consider mutual funds or equities instead.
🏁 Future Outlook – Will New Tax-Free Bonds Be Issued?
As of June 2025:
- No indication of fresh tax-free bond issuances.
- The government has focused more on taxable infrastructure bonds and sovereign green bonds.
- Demand for existing tax-free bonds remains very high, pushing up their prices and reducing yields.
✅ Final Tips for Tax-Free Bond Investors
- Check YTM (yield-to-maturity) before buying from secondary markets.
- Don’t overpay: If the price is too high, effective yield drops below safer taxable options.
- Hold till maturity for full benefit.
- Diversify across issuers if investing more than ₹10 lakh.
- Combine with other tax-saving options (like PPF, ELSS) for optimal planning.
📌 Conclusion
Tax-free bonds in India continue to be one of the safest, most tax-efficient investments, especially for those in the higher tax brackets. While new issues may be rare, buying existing bonds through the stock exchange is still a smart move for generating stable, tax-free passive income in 2025 and beyond.
If you’re building a long-term, low-risk portfolio — tax-free bonds are a must-consider addition.