Last Updated on April 5, 2026 by teamtfl
I remember the queues. December 2011. NHAI and PFC were offering tax-free bonds at 8.2-8.3% for 10-15 years, and HNI investors — senior professionals earning Rs. 30-50 lakh a year — were scrambling to subscribe before the issue closed. The effective pre-tax equivalent yield for a 30% bracket investor was close to 12%. Nothing came close.
That window is closed. New tax-free bonds have not been issued by the government since FY2016-17. But the story doesn’t end there.
If you already hold tax-free bonds from those years, this guide tells you what you have. If you want to buy some now, they’re available in the secondary market — and for an investor in the 30% bracket, the yields still make a compelling case. Here’s everything you need to know in 2026.
⚡ Quick Answer
New tax-free bonds have not been issued since 2016-17. Existing bonds from NHAI, PFC, REC, HUDCO, IRFC, and other PSUs trade actively in the secondary market on BSE/NSE. Interest is fully exempt from income tax regardless of your bracket — no TDS, no filing required. Capital gains on secondary market sale are taxable. For investors in the 30% bracket, these remain one of the most tax-efficient fixed-income instruments available.
What Are Tax-Free Bonds?
Tax-free bonds are debt instruments issued by government-backed PSUs (Public Sector Undertakings) where the interest income is fully exempt from income tax under Section 10(15)(iv)(h) of the Income Tax Act. This exemption applies regardless of your tax bracket, regardless of the amount of interest earned, and with no TDS deduction.
They are not to be confused with tax-saving instruments like PPF or ELSS, where you get a deduction on the investment. With tax-free bonds, there is no deduction on the principal. The benefit is entirely on the interest side — it is simply not taxable.
The bonds that were issued between 2011 and 2017 came from marquee PSUs: NHAI (National Highways Authority of India), PFC (Power Finance Corporation), REC (Rural Electrification Corporation), HUDCO (Housing and Urban Development Corporation), IRFC (Indian Railway Finance Corporation), NTPC, and NHB (National Housing Bank). All AAA-rated. All government-backed.
Tax-Free Bonds — Key Characteristics
Interest Tax
Zero
No TDS, no IT
Issuer Credit
AAA
Govt-backed PSUs
Liquidity
Listed
BSE and/or NSE
Interest Pay
Annual
Fixed coupon
The Secondary Market — Where You Buy Them Now
Since new issues stopped after 2016-17, the only way to invest in tax-free bonds today is through the secondary market — buying from existing holders via BSE or NSE. You need a demat account.
The secondary market price of a bond is not its face value. It moves inversely with interest rates. When market interest rates rise, existing bond prices fall — and the effective yield for a secondary market buyer improves. When rates fall, prices rise and yields compress.
In a rising rate environment (like we saw in 2022-23), secondary market tax-free bond yields improved significantly. Investors who bought at those prices locked in attractive effective yields. In a softening rate environment (which 2024-25 has seen), prices have risen and current yields are more moderate.
The key bonds to look for by ISIN on BSE/NSE: NHAI tax-free bonds (multiple series), PFC tax-free bonds, REC tax-free bonds, HUDCO bonds, IRFC bonds, and NTPC tax-free bonds. Maturities range from bonds that are already matured to those with remaining tenures through 2034.
💡 The Tax Advantage — What It Actually Means in 2026
A tax-free bond paying 6.5% coupon is equivalent to a taxable instrument yielding approximately 9.3% pre-tax for an investor in the 30% bracket. For a senior executive with Rs. 50 lakh in fixed income — this difference in effective yield matters enormously over a 10-year period. No FD, no corporate bond, no debt mutual fund gives you genuinely tax-free interest at this credit quality.
Tax Treatment — Fully Understood
Interest income: Completely tax-free. No TDS. No inclusion in total income. No need to declare separately in ITR (though it’s good practice to disclose in the exempt income schedule). This applies regardless of whether you receive Rs. 10,000 or Rs. 10 lakh in interest. The exemption is absolute under Section 10(15)(iv)(h).
Capital gains on secondary market sale: Fully taxable. If you buy in the secondary market and sell before maturity, any profit is a capital gain. As per Budget 2024 changes: short-term capital gains (held under 12 months) are taxed at your income slab rate; long-term capital gains (held over 12 months) are taxed at 12.5% without indexation benefit.
Capital gains at maturity: None. If you hold to maturity, the issuer redeems at face value. Since you may have bought at a premium or discount in the secondary market, you may book a capital gain or loss at that point — but if purchased at face value originally, there is no capital gain at maturity.
⚠️ Important 2024 Tax Change
Budget 2024 changed the LTCG rate for bonds from 10% to 12.5% (without indexation). This affects secondary market buyers who sell before maturity. If you’re planning to hold to maturity, this change doesn’t affect you. Verify current tax rates with your advisor before transacting — tax rules on debt instruments have been revised multiple times in recent years.
Who Should Consider Tax-Free Bonds?
The tax advantage only matters if you pay tax. Here’s the honest calculus:
30% bracket investors: Tax-free bonds are highly attractive. A 6.5% tax-free yield translates to a pre-tax equivalent of ~9.3%. This beats most AAA-rated taxable alternatives net of tax. For this bracket, tax-free bonds should be a serious consideration for the fixed-income portion of any retirement portfolio.
20% bracket investors: Moderately attractive. A 6.5% tax-free yield has a pre-tax equivalent of ~8.2%. Still competitive, particularly compared to bank FDs at the same credit quality.
Nil/5% bracket investors: The tax advantage largely disappears. The liquidity constraints and interest rate risk of bonds make them less suitable compared to simpler bank FDs or liquid funds.
The ideal buyer: A senior executive aged 50-65 in the 30% bracket, looking for predictable, genuinely tax-free annual income to fund part of their retirement cash flow. Tax-free bonds do one thing exceptionally well — they deliver fixed, tax-free annual income with near-zero credit risk for the full tenure.
Liquidity and Interest Rate Risk
Two risks that are often underestimated:
Liquidity risk: While these bonds are listed on exchanges, not all series are actively traded. NHAI and REC bonds tend to have better secondary market depth. Some HUDCO or smaller series may have thin volumes — meaning you may not be able to sell at a fair price quickly if you need funds. Do not invest money in tax-free bonds that you may need in the next 2-3 years.
Interest rate risk: If you buy in the secondary market at a premium (above face value) and rates subsequently rise, the market price of your bonds falls. This only matters if you sell before maturity. If you hold to maturity, you receive face value regardless of market price fluctuations along the way. Buy with the intention to hold to maturity.
Want to evaluate whether tax-free bonds belong in your retirement portfolio?
The answer depends on your tax bracket, your existing fixed-income allocation, and how much predictable annual income your retirement plan requires. A structured review takes 30 minutes.
Frequently Asked Questions
Are new tax-free bonds being issued in India in 2026?
No. The government has not issued new tax-free bonds since FY2016-17. Existing bonds from NHAI, PFC, REC, HUDCO, IRFC, and other PSUs continue to trade in the secondary market on BSE and NSE.
How can I buy tax-free bonds in 2026?
Through the secondary market on BSE or NSE via your demat account — the same way you’d buy a listed equity share. Search for NHAI, PFC, REC, HUDCO, or IRFC bonds by ISIN or company name. Prices fluctuate daily, so check current yields before buying. Working with an advisor helps ensure you buy at a fair price relative to the yield curve.
What is the tax treatment of tax-free bonds?
Interest income is fully exempt under Section 10(15)(iv)(h) — no TDS, no income tax, regardless of amount or bracket. Capital gains on secondary market sale are taxable: short-term (under 12 months) at slab rates, long-term (over 12 months) at 12.5% without indexation as per Budget 2024. No capital gains if held to maturity and purchased at face value.
Are tax-free bonds better than FDs for a 30% bracket investor?
For a long-term, hold-to-maturity investor in the 30% bracket, yes — the effective post-tax yield of tax-free bonds is typically significantly higher than bank FDs at the same credit quality. A 6.5% tax-free coupon equals ~9.3% pre-tax equivalent. Most bank FDs don’t come close on a post-tax basis in the 30% bracket.
Which tax-free bonds are available in the secondary market?
NHAI, PFC, REC, HUDCO, IRFC, NTPC, and NHB bonds issued between 2011-2017 are available on BSE/NSE. Maturities range from already-matured to bonds running through 2034. NHAI and REC tend to have better secondary market liquidity. Always check current prices and remaining tenure before buying.
Tax-free bonds are not exciting. They don’t compound. They don’t grow. They just deliver fixed, genuinely tax-free income year after year — from a government-backed entity that cannot default on a rupee-denominated obligation.
For a senior executive building retirement income, boring is exactly what you need.
💬 Your Turn
Do you hold tax-free bonds from the 2011-2017 era? Are you considering buying in the secondary market? Share your situation below — or ask about how they compare to your current fixed-income alternatives.
is it one time investment or do i need to investment the same amount every year upto( say 10 or 15 years)?
Hi Balaji,
It’s one time investment.
Hemant,
is it advisible to put in these Bonds? i have a plan to put in PPF, will it be wise if i reduce the ppf amount and put it to these bonds instead?
Thanks in Advance
Abhishek
Hi Abhishek,
Investment in PPF should be done if tax saving u/s 80C is the purpose. In other case these bonds can be considered for long term debt investments.
First save up to 100,000 limit of PPF and then think about these bonds. These bonds do not qualify fot 80C.
Dear author, I do not think calculating effective yields on the annual payput of 8.2% and 8.3% is correct. For one, there is no tax deduction like the case with 80C or 80CCF investments. Two, the interest is paid out every year and only the principal is paid out. Instead what you need to to do is compare this with the yield net of tax on other instruments. For instance a 9% bank deposit will yiled lower returns of 6.3% post tax (30% tax bracket) compared with NHAI bond.
Hi Vidya,
Thanks for mentioning this. You are right – if we look at the figures on one year basis, effective yield is right but not on 10-15 year horizon.
Hi,
Can the bond taken initially in Physical form be later converted to demat form ?
-tks
Hi Manoj,
I believe you can.
While the interest rate is good and interest earned is tax-free, since it is paid annually it is actually not that attractive. The compounding effect is missing, and so, return is nearly same as another investment which would give 6% compounded annually and tax-free.
Definitely inferior to PF/PPF, atleast based on their current interest rates.
Considering bank deposits, SBI currently offers 9.25% for 10-yr FDs. Even for someone at 30% tax slab, that comes to approx 6-6.5% after tax. Since these compound on a quarterly basis, final return will be higher. Also, it says here tax status after DTC is unknown for these bonds.
So given all this, why invest in these bonds ?
I sort of agree with you Ayush. The annual payout makes it simple interest, where your base amount stays constant, thus defying the power of compounding. Nice observation, more like contrarian :-).
Hi Ayush/Mansoor,
You are absolutely right – I have written a new article where I have shown comparison between SBI FD & Tax Free Bonds. Difference is negligible. Check this
Does it make much sense to invest in tax free bonds?
https://www.retirewise.in/2011/12/pfc-tax-free-bonds.html
ThanxHEMANT JI
useful advice
Amita
Thanks Amita.
i would like to know whether these bonds can be pledged in future to avail loan
I understand the effective returns (11.87 and 12.01) displayed in the Economic Times article are not correct.
I have tried to calculate by taking yearly repayments of 8.2%*(1+tax rate) for 20% and 30% brackets but even that does not give the returns from ET. Also as these do not have 80C benefits the above method is not correct. Then how is ET calculating these retuns?
ET Calculations are base on 30.9 % tax levied on HNI’s.
8.20 % works out to be 8.20 %*(100-30.9) = 11.87 %
8.30 % works out to be 8.30 % *(100-30.9) = 12.01 %.
The only bonds with ‘AAA’ rating which are listed are SBI (15yr) 9.95 % bonds . SBI Bonds were issued in March 2011 @ 10000 per bond. Current Value of 11100 works to 9.45% YTM (Yield to maturity) . The above yield is subject to tax. Taxable yield works to 6.53 %. NHAI and PFC are coming at 8.3%. the difference in taxable yield is 1.77%. Were the NHAI & PFC to list at the same yield (which they would after one month of adjustment) as SBI, they will have to quote @ 15 % premium. GO ahead and subscribe.
Further theses bonds give you an opportunity to plan the falling interest regime. Ideally hold for a period of 2-3 years to make the most out of these bonds.
It appears liquidity is the key. Will these bonds list on stock exchanges immediately. If so they are a very good option as the interest rates will start reducing from Jan 2012. Even if they are listed, is there enough demand for such assets on the stock exchanges.
Can you appraise me of the status of allotment of NHAI & PFC tax free bonds for all the three catagories.
Regards,
Satish Agarwala
Sir my question is are these bonds really good to include in a reitred person’s portfolio which only includes FDs?
I will sold one property in the month of March 2012 . Can I purchase NHAI Bond from open market to save long term capital gain u/s 54 EC.
In future NHAI OR PFC Bonds market value can be increase or decrease for trading purpose ?
Tax free bonds ke against loan le sakte hai kya ?
Thanks & Regards
Rakesh bansal
Agar loan le sakte hai to, what is the procedure & what is the rete of intrest ?
Is the application interest paid till date of allotment taxable?
Yes
there is some confusion about the interest on these bonds… ur article says 8.2% while the NHAI website says 6%, pls advice
Hi Nidhi,
You are talking about 54 EC bonds which are for saving capital gains.
if we hold bond in 6 month then we have receive interest or not
I have invested in PFC bonds – long term infra bonds u/s80CCF 2011, which has a lock in for five years. If for some reason, I do not want to hold these bonds (because I have joined an equity research firm and holding these bonds could potentially create a conflict), can I surrender these bonds to PFC stating that I do NOT need the money, by signing an indemnity etc. Also I can pay the taxes for the last assessment year.
Please suggest some way of exiting even at the cost of losing the investment
I do not thinks its a conflict as you have bought it before joining the equity research firm. max you need to do is give a declaration/disclamier to your companey HR and inform that you are holding these bond.