What is A Bond?
A bond is said to be a debt instrument in which the issuer company borrows money from the lender (bondholder) and, in return, is obliged to pay interest on the principal amount. The interest is called the coupon. The holder enters a formal contract where the issuer decides to repay borrowed money along with interest at fixed intervals, such as on a semi-annual, annual, or monthly basis.
Types Of Bonds:
54 EC Bonds or capital gain bonds of public sector companies are one of the best ways to save on long-term capital gain tax. 54EC Bonds are of paramount importance for a person who has got long-term capital gains and wishes to make a tax exemption on the same. The maximum tax exemption under 54 EC bonds is 50 Lakhs on fulfillment of specified conditions as mentioned in the Income Tax Act.
RBI floating bonds are issued by the Reserve Bank of India. The interest offered is attractive which can fluctuate depending on the rates announced by RBI from time to time. The interest earned from such bonds is taxable and the chances of default are the least considering it to be a RBI-issued security.
Tax-Free Bonds are bonds issued by Government Enterprises. Tax-Free Bonds generally come with a long-term maturity period of more than 10 years. The biggest benefit of tax-free bonds is that the total interest earned from these bonds is tax-free and moreover since they are issued by government enterprises it has a negligible chance of default.
Perpetual Bonds fetch better interest yield as compared to other bonds. They are issued by public sector banks with an option to call (redeem) after a certain number of years. The interest earned is taxable. However, they also offer liquidity as they can be traded over the stock exchange.