No New Tax-Free Bonds Since 2016. 242 Still Trade on NSE/BSE. At the 30% Bracket, a 5% Tax-Free Yield Equals 7.14% From Any Taxable Instrument.
Tax-free bonds are the only fixed-income instrument in India where interest income is completely exempt from income tax. Not reduced. Not deferred. Exempt.
The government issued these through NHAI, REC, PFC, NTPC, IRFC, HUDCO, NHB, and NABARD between 2011 and 2016. Then it stopped. No new issuance has happened in nearly a decade. No Union Budget has proposed restarting them.
What this means for 2026: Tax-free bonds are a finite, depleting asset class. Every maturity permanently reduces the outstanding supply. A wave of 15-year bonds from 2013-2014 matures in 2028-2029. After that, only long-dated bonds (2033-2035) remain. The window to buy is narrowing.
This guide covers the real secondary market data — current prices, yields, tax-equivalent returns at every bracket, the capital gains trap that catches most buyers, and why liquidity is the risk nobody warns you about.
Current Tax-Free Bond Market: May 2026
All bonds are AAA-rated by CRISIL. Government-backed. Interest paid annually. Listed on both NSE and BSE.
Key Bonds Available on Secondary Market
| Issuer | Coupon Rate | Face Value | Maturity | Approx. Market Price | YTM (Tax-Free) |
|---|---|---|---|---|---|
| NHAI | 8.75% | Rs 1,000 | Feb 2029 | Rs 1,050-1,080 | 4.8-5.2% |
| REC | 8.71% | Rs 1,000 | Sep 2028 | Rs 1,050-1,080 | 4.5-5.0% |
| PFC | 8.92% | Rs 1,000 | Nov 2033 | Rs 1,190-1,240 | 4.9-5.3% |
| NTPC | 8.91% | Rs 1,000 | Dec 2033 | Rs 1,180-1,220 | 4.8-5.2% |
| NHB | 9.01% | Rs 5,000 | Jan 2034 | Rs 5,500-5,800 | ~5.0% |
| HUDCO | 7.64% | Rs 1,000 | 2032 | Rs 1,190-1,230 | 4.8-5.2% |
| IRFC | 8.63% | Rs 1,000 | 2029 | Rs 1,170-1,210 | 4.7-5.1% |
| NHB | 8.88% | Rs 5,000 | Jan 2029 | Rs 5,200-5,400 | ~4.8% |
| PFC | 8.79% | Rs 1,000 | Nov 2028 | Rs 1,030-1,060 | ~4.7% |
| NTPC | 8.73% | Rs 1,000 | Dec 2028 | Rs 1,030-1,060 | ~4.6% |
Why the coupon says 8.75% but you earn 5%: These bonds were issued at face value (Rs 1,000) with high coupons. Because the coupon is attractive and supply is limited, buyers bid up the price. At Rs 1,080, the 8.75% coupon on Rs 1,000 face value yields effectively 5% when you account for the premium you paid and the Rs 1,000 you get back at maturity.
The Tax-Equivalent Yield: Why 5% Tax-Free Beats 7% Taxable
This is the single most important concept for evaluating tax-free bonds.
Formula: Tax-Equivalent Yield = Tax-Free YTM / (1 - Marginal Tax Rate)
| Tax-Free YTM | 0% Bracket | 5% Bracket | 10% Bracket | 20% Bracket | 30% Bracket | 30% + Cess (31.2%) | Highest Effective (~39%) |
|---|---|---|---|---|---|---|---|
| 4.5% | 4.50% | 4.74% | 5.00% | 5.63% | 6.43% | 6.54% | 7.38% |
| 5.0% | 5.00% | 5.26% | 5.56% | 6.25% | 7.14% | 7.27% | 8.20% |
| 5.3% | 5.30% | 5.58% | 5.89% | 6.63% | 7.57% | 7.70% | 8.69% |
Translation: A 30% bracket investor earning 5% tax-free would need a taxable FD paying 7.14% to get the same post-tax return. No major bank offers 7.14% on FDs. SBI’s 5-year FD pays 6.40%. The best small finance bank FDs offer 8-9%, but carry credit risk and DICGC limits.
For the highest effective bracket (~39% including surcharge for income above Rs 5 crore), a 5% tax-free bond equals 8.20% taxable. This beats every sovereign-guaranteed instrument in India.
When Tax-Free Bonds Don’t Make Sense
- 0-10% tax bracket: Post-tax returns from SCSS (8.2%), NSC (7.7%), or RBI FRSB (8.05%) are higher than 5% tax-free
- You need liquidity: Selling on exchange takes effort and may involve 1-3% spread loss
- Short holding period needed: Better to use liquid funds or FDs
How to Buy Tax-Free Bonds in 2026
Option 1: Stock Exchanges (NSE/BSE)
Place a buy order through your regular demat account (Zerodha, Groww, Angel One, etc.).
- Search for the bond ISIN on the “bonds” or “debt” section of your trading platform
- Check the order book — look at available sell orders and bid-ask spread
- Place a limit order at your desired price (do not use market orders — spreads are wide)
- Settlement happens T+1 (bonds are credited to your demat next business day)
Hidden costs:
- Brokerage: Rs 0-20 per order (varies by broker)
- Exchange transaction charges: 0.00025% of trade value
- GST on brokerage: 18%
- STT: Nil on debt instruments
- Stamp duty: 0.0001% on buy side
Option 2: Online Bond Platform Providers (OBPPs)
Platforms like WintWealth, IndiaBonds, GoldenPi, BondDekho aggregate tax-free bond inventory and display it in a more user-friendly format.
Advantages: Easier discovery, curated listings, yield calculators Disadvantages: Some charge markup over exchange price, execution still routes through exchange, may show stale pricing
The Accrued Interest Trap
When you buy mid-year, you pay the seller accrued interest from the last coupon date.
Example: NHAI 8.75% bond, last coupon paid January 15. You buy on May 3.
- Days since last coupon: ~108 days
- Daily accrual: Rs 1,000 x 8.75% / 365 = Rs 0.2397/day
- Accrued interest you pay: Rs 25.89 per bond
- You recover this when the next annual coupon (Rs 87.50) is paid to you
Many platforms show the “dirty price” (clean price + accrued interest) without breaking it out. You need to check whether the quoted price includes accrued interest or not.
Capital Gains Tax: The Part That Is NOT Tax-Free
Interest income is tax-free. Capital gains on selling are NOT.
If You Sell on the Secondary Market
| Holding Period | Tax Classification | Tax Rate (Post-July 2024) |
|---|---|---|
| More than 12 months | LTCG | 12.5% (no indexation) |
| 12 months or less | STCG | Your income tax slab rate |
If You Hold to Maturity
At maturity, you receive face value (Rs 1,000 or Rs 5,000). If you bought at a premium:
- Bought at Rs 1,080, received Rs 1,000 = Rs 80 capital loss
- This loss can be set off against other capital gains
If you bought below face value (rare for tax-free bonds currently):
- Bought at Rs 980, received Rs 1,000 = Rs 20 capital gain
- Taxed at 12.5% (LTCG) if held more than 12 months
Strategic implication: Buying at a premium and holding to maturity creates an automatic capital loss that can offset gains from stocks, mutual funds, or property. This is a genuine tax-planning opportunity most investors miss.
The Supply Extinction Problem: Why This Asset Class Is Disappearing
No new tax-free bonds have been issued since 2016. Every maturity reduces the outstanding supply permanently.
Maturity Wave: 2028-2029
Multiple bonds from 2013-2014 (originally 15-year maturity) will redeem:
| Issuer | Coupon | Maturity Date | Issue Size |
|---|---|---|---|
| NHAI | 8.75% | Feb 2029 | Rs 1,190 Cr |
| REC | 8.71% | Sep 2028 | Rs 1,171 Cr |
| PFC | 8.79% | Nov 2028 | Rs 353 Cr |
| NHB | 8.88% | Jan 2029 | Rs 86 Cr |
| NTPC | 8.73% | Dec 2028 | Rs 91 Cr |
| NHB | 8.68% | Mar 2029 | Rs 422 Cr |
After 2029, only long-dated bonds (2032-2035 maturity) remain. These will become increasingly scarce. Simple supply-demand economics suggests their prices will rise further, pushing YTMs even lower.
Implication for investors: If you want tax-free bond exposure, the window is now. Every year, the available supply shrinks and premiums grow.
Tax-Free Bonds vs Every Alternative: Post-Tax Comparison at 30% Bracket
| Instrument | Gross Rate | Post-Tax Yield (30% Bracket) | Liquidity | Lock-in |
|---|---|---|---|---|
| Tax-free bonds | 4.8-5.3% YTM | 4.8-5.3% (tax-free) | Low (exchange) | Hold to maturity ideal |
| PPF | 7.10% | 7.10% (EEE) | Partial after Yr 7 | 15 years |
| SCSS | 8.20% | 5.74% | After 1 year (penalty) | 5 years |
| RBI FRSB | 8.05% | 5.64% | Zero (7-year lock) | 7 years |
| NSC | 7.70% | 5.39% | Zero | 5 years |
| SBI FD (5-yr) | 6.40% | 4.48% | Penalty on premature | 5 years |
| Debt mutual fund | 7.0% (typical) | 4.90% | T+1 | None |
| KVP | 7.50% | 5.25% | After 30 months | 115 months |
Key takeaway: Tax-free bonds at 5% YTM deliver the same post-tax return as SCSS at 8.2% for a 30% bracket investor — without the Rs 30 lakh investment cap. PPF is superior at 7.1% tax-free, but has a Rs 2 lakh/year deposit limit and 15-year lock-in. Tax-free bonds have no investment ceiling.
The Optimal Buyer: Who Should Actually Buy Tax-Free Bonds
Strong fit:
- 30% bracket or higher — the tax-equivalent yield advantage is massive
- Large corpus to deploy — you have maxed PPF (Rs 2L/year) and SCSS (Rs 30L for seniors) and still have surplus
- Can hold to maturity — buying 2028-2029 maturity means only 2-3 years
- Retirees seeking tax-efficient income — annual coupon arrives tax-free, no ITR complexity
- Portfolio tax-loss harvesting — buying at premium creates built-in capital loss at maturity
Poor fit:
- Below 20% tax bracket — the tax advantage is small; SCSS/NSC/FRSB give higher absolute returns
- Need liquidity — selling takes effort; a debt fund with T+1 redemption is better
- Small investment amounts — brokerage and spread costs erode returns on sub-Rs 50,000 investments
How to Find Specific Tax-Free Bonds by ISIN
Every tax-free bond has a unique ISIN (International Securities Identification Number). Search your broker’s platform using these ISINs for the most traded bonds:
| ISIN | Issuer | Coupon | Maturity | Face Value |
|---|---|---|---|---|
| INE906B07DF8 | NHAI | 8.75% | Feb 2029 | Rs 1,000 |
| INE020B07HS2 | REC | 8.71% | Sep 2028 | Rs 1,000 |
| INE134E07463 | PFC | 8.92% | Nov 2033 | Rs 1,000 |
| INE733E07JJ9 | NTPC | 8.91% | Dec 2033 | Rs 1,000 |
| INE557F07132 | NHB | 9.01% | Jan 2034 | Rs 5,000 |
| INE557F07124 | NHB | 8.88% | Jan 2029 | Rs 5,000 |
| INE134E07448 | PFC | 8.79% | Nov 2028 | Rs 1,000 |
| INE733E07JI1 | NTPC | 8.73% | Dec 2028 | Rs 1,000 |
| INE557F07157 | NHB | 8.68% | Mar 2029 | Rs 5,000 |
| INE557F07108 | NHB | 8.76% | Jan 2034 | Rs 5,000 |
Tip: Not all ISINs trade daily. Check the order book before placing your order. If only 2-3 sell orders exist, the spread may be wide. Place a limit order and be patient.
Budget 2026 Context: SGB Tax Change Makes Tax-Free Bonds More Attractive
Budget 2026 changed Sovereign Gold Bond taxation: if you buy SGBs from the secondary market after April 1, 2026, capital gains on redemption are no longer tax-free — even if held to maturity. This was a significant blow to the secondary market SGB strategy.
The indirect effect: Investors seeking tax-efficient fixed-income alternatives are now looking at tax-free bonds more seriously. Demand for tax-free bonds could increase, pushing prices higher and YTMs lower. If you are considering buying, sooner is better than later.
NRI Considerations
NRIs can buy tax-free bonds through an NRE or NRO-linked demat account.
| Factor | NRE Account | NRO Account |
|---|---|---|
| Repatriation | Fully repatriable | USD 1M/year cap |
| Interest taxation in India | Tax-free (Section 10(15)(iv)(h)) | Tax-free (Section 10(15)(iv)(h)) |
| Capital gains tax in India | LTCG 12.5%, STCG at slab | LTCG 12.5%, STCG at slab |
| TDS on capital gains | 30% + surcharge (reducible via DTAA) | 30% + surcharge (reducible via DTAA) |
| Tax in home country | Check DTAA; interest may be taxable abroad | Check DTAA; interest may be taxable abroad |
US-resident NRIs: Tax-free bonds are NOT tax-free in the US. The IRS taxes worldwide income. The Section 10(15) exemption applies only to Indian tax. You can claim foreign tax credit in the US for any Indian tax paid on capital gains.
The Liquidity Warning Nobody Gives You
Tax-free bonds are listed on exchanges but trade in thin volumes. This creates real problems:
- Wide bid-ask spreads: The difference between what buyers are willing to pay and sellers are asking can be 1-3% on illiquid ISINs. On a Rs 1 lakh investment, that is Rs 1,000-3,000 lost to the spread
- Days to fill: Your limit order may sit unfilled for 2-5 days on less popular ISINs
- Price impact: A large sell order (Rs 10 lakh+) in a thin market can move the price against you by 1-2%
- No guaranteed exit: Unlike debt mutual funds with T+1 redemption, nobody is obligated to buy your bond
Mitigation strategies:
- Stick to larger issuers (NHAI, REC, PFC) with better liquidity
- Place limit orders, never market orders
- Plan to hold to maturity — avoid depending on secondary market exit
- Buy bonds maturing in 2-3 years to minimize the period you are exposed to liquidity risk
Step-by-Step: Your Tax-Free Bond Buying Checklist
- Check your tax bracket. If below 20%, stop here. SCSS, NSC, or FRSB give better absolute returns
- Calculate how much to allocate. Only after maxing PPF (Rs 2L/year) and SCSS (Rs 30L for seniors)
- Choose maturity. 2028-2029 for safety; 2033-2035 for higher yield
- Find the ISIN. Use the table above or search on your broker platform
- Check the order book. Ensure there are sell orders at reasonable prices
- Calculate YTM. Use an online bond yield calculator — do not rely on coupon rate
- Account for accrued interest. Check if the quoted price includes it
- Place a limit order. Be patient — it may take 1-3 days to fill
- Track in ITR. Interest is exempt but report under exempt income schedule. Capital gains (if any) go under capital gains schedule
The Bottom Line
Tax-free bonds are not glamorous. They are not discussed in WhatsApp investment groups. They do not double your money.
What they do: pay you 5% per year that the government cannot tax. For a 30% bracket investor, that is equivalent to 7.14% from any FD, SCSS, or debt fund. For someone above Rs 5 crore income, it equals 8.20%.
They are a finite, depleting asset class. Every year, more bonds mature and the remaining supply shrinks. The premiums will only grow.
If you are in the 20%+ bracket, have surplus beyond PPF and SCSS limits, and can hold to maturity — tax-free bonds are one of the best risk-adjusted allocations available in India today.
Tax-free bond prices and yields quoted are indicative as of May 2026 and will vary based on market conditions. Always verify current prices on NSE/BSE or your trading platform before placing orders. This is not investment advice — consult your financial advisor for personalized recommendations.