Last Updated on April 24, 2026 by teamtfl
A client walked into my office in 2012 with a cheque ready to write. NHAI tax-free bonds had just launched. 8.2% tax-free. His eyes lit up when I showed him the tax-equivalent yield for someone in the 30% bracket – nearly 12%.
“Should I put everything here?” he asked.
I gave him my favourite answer: “Depends.”
That conversation is still relevant in 2026 – but the context has completely changed. No new tax-free bonds have been issued since 2016. The primary market that existed in 2012 is closed. But the secondary market question – whether to buy existing tax-free bonds trading on NSE/BSE today – is very much alive, especially for senior executives managing their debt allocation in retirement.
Quick Answer
Tax-free bonds (NHAI, PFC, REC, HUDCO, IRFC) are only available in the secondary market in 2026 – often at a premium to face value, with effective yields of 4.5 to 5.5% YTM. They make sense for investors in the 30% tax bracket looking for predictable, government-backed income. They do not make sense as a wealth creation tool. The three-question framework below tells you whether they belong in your portfolio.
The 2026 reality – no new issues, only secondary market
Between 2011 and 2016, the government allowed PSUs like NHAI, PFC, REC, HUDCO, IRFC, and NABARD to raise money through tax-free bond issues. These were popular, often oversubscribed, and offered coupon rates of 7.35% to 8.5% depending on tenure. Then the government stopped. No new tax-free bond issues have come since 2016.
If you want to buy tax-free bonds today, your only option is the secondary market on NSE or BSE, or through bond platforms like GoldenPi, IndiaBonds, or Wint Wealth. Two things to understand about the secondary market:
First, these bonds now trade at a premium to their face value in most cases – because they carry a higher coupon than currently available alternatives and are government-backed. A bond with a face value of Rs.1,000 and a 7.5% coupon may now cost Rs.1,100 to 1,200 to buy.
Second, the yield you actually earn is not the coupon rate – it is the Yield to Maturity (YTM). At a 15 to 20% premium to face value, the effective YTM on most tax-free bonds in early 2026 is approximately 4.5 to 5.5%. Always calculate YTM before buying, not just the coupon.
Also read: NPS Review 2026: A Retirement Advisor’s Honest Assessment
Question 1 – Are tax-free bonds risk free?
For most investors, risk means losing the principal. On that measure, tax-free bonds carry very little risk – they are issued by government-backed PSUs with AAA ratings from ICRA and CARE. The probability of default is close to nil.
But there are three other risks that matter more in practice:
Interest rate risk: Bond prices and interest rates move in opposite directions. If market rates rise, the market price of your bond falls. This only matters if you need to sell before maturity. If you hold to maturity, this risk is irrelevant.
Liquidity risk: The only exit before maturity is selling on the stock exchange. Tax-free bonds have thin secondary market volumes compared to equities. If you need to sell in a hurry, you may have to accept a lower price. This is not the right instrument for money you may need urgently.
Reinvestment risk: This is the most underestimated risk. Tax-free bonds pay interest annually – not cumulatively. So every year, you receive a coupon payment that you must reinvest somewhere. In 2012, that meant reinvesting at 8 to 9% in FDs. In 2026, it may mean reinvesting at 6 to 7%. Over a 15-year bond, this compounding difference is substantial. The effective return depends not just on the bond’s coupon but on where you reinvest the annual payouts.
Question 2 – Are tax-free bonds better than a bank FD?
The original 2012 comparison showed a marginal 0.25% advantage for PFC tax-free bonds over SBI 10-year FDs for investors in the 30% bracket. The calculation used 9.25% FD rates and 8.2% tax-free coupon rates – both now deeply historical.
In 2026, the comparison looks like this:
SBI 10-year FD: approximately 6.25 to 6.45% pre-tax. After 30% tax, the effective post-tax return is approximately 4.4 to 4.5%.
Tax-free bond YTM (secondary market): approximately 4.5 to 5.5% depending on which bond, which tenure, and current market price – and this is already tax-free.
For someone in the 30% bracket, tax-free bonds still have a small advantage – roughly 0.5 to 1% after adjusting for tax. But this comes with two trade-offs: you pay a premium to buy them, and they have limited liquidity compared to an FD.
For someone in the 20% or lower tax bracket, the advantage narrows further and may not justify the liquidity constraint.
Capital gains are not tax-free
The interest from tax-free bonds is exempt from income tax. But if you sell in the secondary market before maturity, capital gains are fully taxable. Short-term gains (held under 12 months) are taxed at your income slab rate. Long-term gains (held over 12 months) are taxed at 12.5% without indexation as per current rules. Factor this in when considering secondary market purchases.
Question 3 – Are tax-free bonds for wealth creation?
No. This has not changed since 2012.
Tax-free bonds are a capital preservation tool – not a wealth creation tool. A 5% tax-free return, while attractive versus comparable debt instruments, does not beat education inflation (10 to 12%), medical inflation (14%), or the long-term equity compounding that has averaged 12 to 14% annually in India over any 15-year period.
The right use case for tax-free bonds is the debt portion of a retirement portfolio – providing predictable, tax-efficient income while equity handles the growth mandate. Buying them with money earmarked for wealth creation over 15 to 20 years is a mistake.
Also read: Zero Equity in Retirement Is Also a Risk – It Just Doesn’t Show Up on Day One
Who should consider tax-free bonds in 2026
Tax-free bonds make the most sense for:
- Investors in the 30% tax bracket who want predictable income with zero credit risk
- Retirees or near-retirees who have a specific income requirement from the debt portion of their portfolio and can hold to maturity
- Those with a 5 to 10 year horizon who can find bonds maturing around their target date in the secondary market
Tax-free bonds are not suitable for:
- Anyone who may need the money before maturity
- Investors in the 5% or 10% tax bracket – the tax advantage is minimal
- Anyone treating them as a substitute for equity growth
✅ How to buy in 2026
Search for NHAI, PFC, REC, HUDCO, or IRFC bonds on NSE/BSE through your demat and trading account, or use bond platforms like IndiaBonds, GoldenPi, or Wint Wealth. Always check the YTM, not just the coupon rate. Bonds trading at heavy premiums (above 20% over face value) significantly compress your effective return.
My answer is still DEPENDS – but now here is exactly what it depends on
In 2012, the answer depended on your tax bracket and whether you could beat the FD rate after tax. In 2026, three additional factors matter:
1. The price you pay. Secondary market premiums can eat into your effective yield significantly. Always calculate YTM before buying.
2. Your liquidity needs. These are long-duration instruments with thin trading volumes. Do not commit money you may need within 3 to 5 years.
3. Your overall portfolio context. Tax-free bonds belong in the debt bucket – not as a substitute for equity. If your retirement portfolio is already 60 to 70% in FDs and fixed income, adding more of the same does not improve your financial security. It may worsen it by removing the equity return that beats inflation over 20 to 25 years.
Also read: 15 Types of Risk in Investment Every Indian Should Know
Unsure how debt instruments fit into your retirement plan?
Allocation between equity, FDs, tax-free bonds, and debt funds is one of the most consequential decisions in retirement planning. We work through this with clients as part of a structured retirement review. If you would like a second opinion on your debt allocation, let’s have a conversation.
Frequently asked questions
Can I still buy tax-free bonds in India in 2026?
Yes, but only through the secondary market. No new tax-free bonds have been issued since 2016. Existing bonds issued by NHAI, PFC, REC, HUDCO, IRFC, and others are listed and tradeable on NSE and BSE through your demat account, or via bond platforms like IndiaBonds, GoldenPi, and Wint Wealth.
What is the current yield on tax-free bonds in 2026?
As of early 2026, most tax-free bonds trade at a premium in the secondary market. The effective Yield to Maturity (YTM) is approximately 4.5 to 5.5% depending on the bond, tenure remaining, and current market price. The coupon rate printed on the bond (7 to 8.5%) is not the yield you earn when buying at today’s prices. Always calculate YTM before purchasing.
Is the interest from tax-free bonds really tax-free?
Yes. Interest income from notified tax-free bonds is exempt from income tax under Section 10(15)(iv)(h) of the Income Tax Act – regardless of your tax bracket. However, capital gains from selling in the secondary market before maturity are taxable. Long-term gains (held over 12 months) are taxed at 12.5% without indexation as per current rules.
Are tax-free bonds better than PPF or FD for retirement?
At current secondary market yields of 4.5 to 5.5%, tax-free bonds offer a modest advantage over FDs (post-tax 4.4 to 4.5%) for investors in the 30% bracket. PPF at 7.1% tax-free remains more attractive for anyone with a 15-year horizon who can stay within the Rs.1.5 lakh annual limit. Tax-free bonds are most useful when you need more than the PPF limit allows and want government-backed, fixed, tax-free income.
Are tax-free bonds safe?
From a credit risk perspective, yes – these are AAA-rated bonds issued by government-backed PSUs. Default risk is negligible. The real risks are interest rate risk (price falls if rates rise, relevant only if you sell before maturity), liquidity risk (thin secondary market volumes), and reinvestment risk (annual coupon payments must be reinvested somewhere, possibly at lower rates).
Do you hold tax-free bonds from the 2012 to 2016 era, or are you considering buying in the secondary market today? Share your situation in the comments – I am happy to work through the numbers with you.
What is your view for those retired people, who are in highest tax bracket but need money for regular consumption and for that depend on interest income from deposits/securities?
Hi Anil,
Taxation plays a key role in earning the right amount of income. For highest tax bracket individuals, choosing the right options is very important.
There is hardly any instrument which gives you higher post tax fixed returns. You can lower taxability by choosing a mix of fixed and variable options. Mutual Funds have options in debt investments where you can earn a good regular income.These are highly tax efficient then traditional deposits/securities.Although the income will be variable, but there are schemes where you will find consistency.
Hi Hemant
A very useful post. I read your thoughts on Onemint and liked this-
Budget is the “”numero uno”” step of financial planning & it is also the only panacea for good financial health. With technological enhancements, every day it we face new ways to spend our money without realizing its long term impact.
When you don’t have budget everything looks important & necessary. Biggest problem of not having budget means you are likely suffering a financial disease called “”I NEED IT NOW””. It looks so good so… I NEED IT NOW, there is good discount so… I NEED IT NOW, my friend bought it & I am suffering without it so…. I NEED IT NOW & the story continues. Are you a kid?? Remember the most insane reasons we gave to our parents just to own a stupid looking toy. Don’t feel guilty you still have time to improve it. Just do it!!”
I was waiting for your New Year Resolutions. Here I share my thoughts.
I will try to conquer my worst impulses to save my financial future.
I will try to recognize the potential danger in every investment decision I make.
Some thoughts for the readers.
– Do not constantly judge your own success by that of others.
– Do not resent the success of others when your own investments falter.
– Do not refuse to accept help or advice from others.
– Do not think that you alone know what is the best investment.
– Do not make investments based purely on media hype or industry buzz.
– Be guided in your investment decisions by common sense and cold hard numbers.
– Do not hold on to your investments long after their expiry date.
– Do not be frustrated by short term changes in the market.
– Do not sacrifice the long term growth for the quick hit.
– Do not gobble up every investment instrument in sight without caring about your financial health.
– Do not ignore your financial future.
Hi Anil,
Your tips are awesome & I expect an article around them.:)
Muthoot Finance current NCD’s are also available for 2 years @ 13% Interest p.a.
I think this is a good option to invest for 2 years. It had fairly decent ratings too.
It may not go bankrupt in 2 years. I have invested some money in it.
Rakesh
Great points raised Hemant. I would put my two cents for the other side of coin: why people are rushing in for these bonds.
1. There is volatility in the equity markets
2. Rate cut expectation in next 3-6 months with the interest rate at its peak,(tentatively)
3. AAA rated, tax free government backed paper giving a return of 8+% (though some have said pre-tax return of 11.7% for those taxed in the 30% bracket )
In the present scenario is seems a good option worth considering. And it also helps to do asset diversification.
But one needs to be careful of cons of the scheme which you have highlighted ex: Liquidity, reinvestment risk. Newspapers, Financial magazines, mail boxes or mobiles are bombarded with these offers. Infact a friend of mine who was out of station for last two days thought she cannot apply as bonds have been over subscribed. (Retail portion of the bond was not fully subscribed till yesterday )
Assuming one has a financial plan -Before one invests one needs to check if this option fits into the financial plan and then consider the option and see if it fits in.
But if one doesn’t then..I shall anecdote from “Alice in Wonderland” book
One day Alice came to a fork in the road and saw a Cheshire cat in a tree.
“Which road do I take? she asked.
Where do you want to go? was his response. I don’t know, Alice answered.
Then, said the cat, it doesn’t matter.”
For additional tax saving & 9 % interest on investment,I will defiantly recommended to invest Rs.20000 / Year.
Dilip
Dear Hemant,Really your article for tax free bonds is transperant and worth appreciating. If I consider for myself it is not worth investing for ten yrs.which is very long duration.Instead if you invest in FDs you have liquidity although there is interest loss. You can avail loan against bank fd but i dont think loan is available in this option.
THANKS FOR INFORMATION
DIPTI
Its good and inormative
Hi Hemant
Thanks. This was an informative read.
Yes I agree, it depends. Especially though it may be considerd a strong view, I do not recommend investing in these bonds just for the purpose of saving tax. At the max, I can think of 2 categories of individuals who could go for it- people who are heavily invested in equities and need to make a portfolio reallocation towards debt, or 50+ who do not have much appetite to take risk.
Thanks again for the valuable post.
Abhinav
Never make an investment to save taxes. Investment mean generating money for future expenses and it can be done by investing equity mutual fund.
Dear Hemant,
This is one more very impressive article. In fact today, I was planning to do the similar comparision as given in your table. I have just one comment: If senior citizen who is in 30.09% tax slab and comparing IDBI 10 year FD (10.25% for senior citizens), even if it is quarterly compounding and yearly tax deduction for bank FD, yeild for NHAI/PFC bonds and IDBI bank FD may be similar if Bond Interest reinvestment is in taxable instrument. Do you have any comments about this? Thanks for excellent info.
Hi Hemant,
Very nice article. I don’t understand why people forget to do their home work before making investment in this kind of tax saving bonds.
Still people are running after assured and tax free investment products forgetting inflation.
Time value of money is never taken into consideration.
Purchasing power of Rs.1,00,000 after 20 years will be Rs.6,72,7500.
We forget that investment done today is for future expenses. Only equity mutual funds (assuming 15%) can make that Rs.1lakh work harder to generate Rs.16,36,650.
Jagteraho!!!
Hi Hemant, nice article.
Have a query regarding PFC bond – table A.
If 8200 is invested end of each year for 10 yrs, Future value is 119924.
119924 – (8200 x 10) = 37924
37924 x 30.9% = 11719
Final Value is 208205.
Is this calculation right ?
warm regards
Nipin
Hi Hemant,
Absolutely right. It does not make any sense in investing in these tax free options for long term basis. If I have Rs. 100000 to save for 10 years in order to save tax of Rs. 10000.. it is better for me to forget about Rs. 10000 and invest Rs.90000 in diversified equity funds which will get me more than Rs.208000 after 10 years.Especially when the ELSS is no more considered as tax saving option since next financial year.
Hemant, I have a question related to term plan as well which I have posted in the term plan article..Hope you have a look at it. 🙂
Hi Hemant,
Thanks for the informative comparison. Complement you on the neat explanation. In your calculations for the returns from FD compounded quarterly, I presume tax deduction would happen every year end. Hence the net interest (net of tax deducted) would be less and hence reducing the total principal for following year. SBI quarterly compounding without 0 tax deduction would give a net return of 249556 (and as per IBA charts 249544.4). For a person in 30.9% tax bracket, this would get reduced to 189723 (assumption that tax deduction would happen in first quarter (March end), fifth quarter and so on in each of the 10 years).
Corresponding values for 20.6% tax slabs is 21o710 for 8.2% bond (with returns reinvested at taxable 8.2% ever year end, tax slab remaining unchanged) and 208036 for 9.25% quarterly deposit.
Corresponding values for 10.3% tax slabs is 215215 for 8.2% bond (with returns reinvested at taxable 8.2% ever year end, tax slab remaining unchanged) and 227938 for 9.25% quarterly deposit.
Thanks,
Harsha.
Hi Hemant,
In your first table – why is there a taxable part for PFC bond? Isn’t all of that tax free?
Hi Manshu,
First table is true for NHAI & PFC as rate is 8.2% for 10 years. I am not sure on what rate other issuers will offer their papers – as it depends on rate of Gilt.
Coming to your first question regarding taxable part:
“I may or may not get tax free options or even lower interest rates in future. So assuming that I will invest interest amount in some other instrument which can give me taxable return 8.2% CAGR till the maturity date of my 10 year PFC tax free bonds.”
Got it – thanks
Thanks for sharing your views. I think, you could also highlight that these bonds are ideal for planning retirement income.
Dear Vivek,
In 70-80% of the retirement cases (that I have come across) – people are in lower slabs. But definitely it make sense for someone who is in highest tax slab.
I think we should not worry too much about compounding. If one wants to compound the money, he can always reinvest the interest every year and buy more bonds from exchange. Of course, you may not get bonds at Rs 5,000, but at a higher price. I have a crude plan now. Invest 12,00,000 in this for 15 years and get Rs 1,00,000 as interest every year. Invest this 1,00,000 in my daughter’s PPF account for 15 years – till maturity. This way I don’t have to search for money every year for PPF investment and also I can get the ‘compounding’ done.
Hi Bhushan,
Bond + PPF is a superb idea this is similar to people using interest of MIP in RD.
Bond + Equity (interest income going in equity mutual funds) can also work as capital protection fund with potential to generate higher returns. 🙂
The assumption here is rates on PPf will be stable for 15 years
Superb Bhushan!! I liked the idea of combining BONDS+PPF, as the big question for Bonds investors is, where to invest the annual interest without incurring tax on them. For this PPF is the best option wherein the compounding part is taken care and at the same time, you needn’t worry on the tax part as well.