Yield on Tax-Free Bonds

Yield on tax-free bonds refers to the effective return earned by an investor from interest payments on government-backed bonds, where such interest income is exempt from tax under Section 10(15)(iv)(h) of the Income Tax Act, 1961. These bonds are typically issued by public sector undertakings (PSUs) such as NHAI, REC, PFC, or IRFC to raise long-term funds for infrastructure development. While the interest earned is fully exempt from income tax, the capital gains arising from the sale of these bonds before maturity are taxable as per the applicable capital gains provisions. Investors often evaluate the yield by comparing the post-tax return on taxable instruments (like FDs) with the tax-free return offered by such bonds.

Example: An investor earns ₹50,000 interest from an NHAI tax-free bond during the year. Since the interest is covered under Section 10, the entire amount is exempt from income tax