How to Invest in Tax-Free Bonds?

Tax-free bonds are proving an excellent investment for high net worth individuals and organizations that are looking to park significant amount of money for the extended period. A benefit of the tax-free bond is that one does not require paying tax on the returns earned in the form of interest.

There are two modes of investing in the form of tax-free bonds. In the following paragraphs, we will provide with the crucial information about the investment procedure.

How to invest in tax-free bonds?


It is possible for anyone to invest in the tax-free bonds either offline or online. One can additionally hold them in physical or demat format.

  1. Purchasing during the public offer – an individual or a company can invest in tax-free bonds during the Initial Public Offering (IPO) by submitting the required application form. Brokerage firms likewise provide the chance to invest in these bonds through the online process to offer ease of investing. The allotment of the bonds is a first-come first-served basis.
  2. Purchasing after issuance of bonds – post the IPO, buying the bonds is still possible through the exchange. However, it is feasible only when the bonds appear for trading on NSE or BSE. Investment is through the demat account, and the procedure is similar to that of trading shares.

Investing in the public issuance

During the IPO, one can log into the website of the trader and choose the IPO option. The next step requires placing the order. The trader will provide different choices related to the tax-free bond. One can pick one according to the need and investment. The next step involves choosing the ASBA-Retails, Retail, HNI, etc. Select cut-off and pick the lot size of the bonds. Check out Sbi bank’s options for good tax free bond options.

The website will provide a message to confirm the details before proceeding. Read the terms and conditions, and click “I Agree” button. The website will state to hold the needed funds for the lot size of the bonds. After completing the transaction, the site will display confirmation of the deal.

If a user is investing in the offline format, he/she will have to fill the required form and duly fill all the necessary details. They can send the completed application form to the stated address along with the payment to purchase tax-free bonds.

Investing in tax-free bonds after issuance of IPO

If an individual wish to choose tax-free bonds after an IPO, he/she will require a demat account. Majority of the bonds released in the market trade in the NSE or BSE. It is here that one can buy the bonds depending on the availability. The trading is similar to that of the shares. An individual can buy them from the website or choose the assistance of the broker.

The website will consist of all the details related to the bond issued by a particular issuer. One can select the lot size of the bonds and the tenure. Remember that tax-free bonds do not come in large quantities. At the same point, it is vital to consider the purchase cost of the bond. An essential element to consider is the tenure. As most bonds have 10, 15, and 20 years of tenure, selecting them wisely is critical. Nonetheless, it is possible to sell them before maturity. Note that gain from the sales of the bonds is taxable. Also, selling them before the maturity date attracts tax, and long-term gains taxed at 10% with indexation and without indexation at 20%. The indexation price allows the investor to adjust the purchase price according to the market fluctuation.


Investing in tax-free bonds are good. As the name states, one need not pay tax on the returns earned on these bonds. Investing them in the bonds is possible through online or offline. Careful planning is crucial before making any investment in these bonds because of the long tenure.

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