Wisely chosen bonds can act as safe haven for your investments. In this case, tax free bonds can serve as an ideal investment tool as they are totally free from tax payment. However, before investing in tax free bonds you need to know the basic facts about tax free bonds and how they function:

• Tax free bonds come with a lock in-period of 10 to 20 years. The amount invested in a tax free bond cannot be withdrawn before the expiry of applicable lock-in period.
• The interest income earned from these bonds are completely free from income tax.
• Tax free bonds can be transacted in stock exchanges. Any investor can buy and sell these tax free bonds on the stock exchanges.
• Although the interest earned by investing tax free bonds is not taxable, any capital gains received from selling these tax free bonds in the secondary market are taxable.
• Tax free bonds are issued both in demat format and physical mode.
• Credit risk or the risk of non-payment is very low in tax free bonds as these bonds are mostly issued by the government enterprises.
• Interest rates on tax free bonds ranges between 7.3% to 7.5% per year. However, these rates are dependent on the ratings on bonds given by credit rating agencies.