Tax Free Bonds: Best Way to Invest Blogging Income

How do you invest your blogging income? Tax Free Bonds might be the best way to save income tax. In India, probably the most popular way to invest money safely for the long term is by bank fixed deposits. But with a whole range of tax free bonds hitting the market in 2013-2014, fixed deposits do not seem to be the best way to invest and make your money grow in the long term.

Taxable Fixed Deposits

save tax

Probably if you make enough blogging income (especially in addition to your day job), there are high chances you might earn enough to be charged 30% tax rate. Even if you invest in a 8.5-9% fixed deposit, it effectively comes down to below 7%, as the interest income adds to your total income and is taxed.

Whereas if you invest in a tax free bond, they usually have a annual interest which is not taxable, and after your maturity period which is usually 10-20 years, you get your original money back. The incoming interest can then be reinvested in other financial instruments like shares, bonds, mutual funds etc. So for a tax free bond at 8.5%, the effective pre-tax rate can come as high as over 11.5-12%!

Tax Free Bonds

Though tax free bonds come rarely every year near end of  tax assessment years, this year it might be different as the Indian Government has allowed 13 public sector institutions (PSU) to raise Rs 48,000 crore in 2013-2014 via tax free bonds! This means many top Government organizations (which are long term safe investment bets with high safety ratings) will hit the market. Some of the top PSU which will offer tax free bonds are like India Infrastructure Finance Company, Indian Railway Finance Corporation, Power Finance Corporation, National Highways Authority of India (NHAI), Housing and Urban Development Corporation and Rural Electrification Corporation (which is already open).

A large portion of the total available bonds (like 40%) is reserved for retail investors like you and me, which means there is a good chance to get the bonds. Though these public issues are open for several weeks, they are mostly available on first come first serve basis, so if you really need to buy them, then buy these tax free bonds on the first day the issue opens. Also note that retail investors have an upper limit which they can invest (mostly like 10 lakhs).

Though the bonds offer long term investment options, many might be traded in stock exchanges (like BSE, NSE), but the rate might be lower as usually retail investors get  a higher interest rate. If you sell these bonds in the secondary market before maturity, it will invite capital gains tax, which will vary depending on short or long terms capital gains. Since interest rates vary with investment period,  it is very important to understand the interest structure and choose the best one.

Buying bonds has become very easy with online trading services like ICICIdirect, ShareKhan etc which allow you to buy these bonds in a few clicks! But if you really want to invest, keep an eye out for these tax free bonds in  financial newspapers, keep free money in your bank / trading account  and save a lot of income tax!

NOTE: We are not financial experts. Please read the bonds prospectus and seek expert investment advice before performing any financial action. This is not a sponsored post and this article is for informational purpose only.

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