Tax-Free Bonds in India: How to Buy Them in 2026
The Government of India hasn't issued a single new tax-free bond since 2016. Everything you can buy today is a bond originally issued between roughly 2012 and 2016, changing hands in the secondary market. This changes both how you buy them and — importantly — what yield you actually earn, which is usually well below the coupon printed on the bond.
What makes a bond "tax-free"
A tax-free bond's interest income is entirely exempt from income tax under Section 10(15) of the Income Tax Act, regardless of your slab rate. This is distinct from ordinary corporate bond or NCD interest, which is fully taxable as income at your slab (see how bonds are taxed in India). It's also distinct from a tax-saving instrument (like ELSS) — a tax-free bond doesn't reduce your taxable income when you buy it, it just doesn't add to it when the coupon arrives.
Why no new issuance since 2016
Tax-free bonds were issued by specific government-backed entities under government approval in tranches through the early-to-mid 2010s, largely to fund infrastructure. The government has not approved a fresh tax-free bond tranche since 2016 — the entire universe of tax-free bonds available today is the surviving stock from that period, gradually shrinking as older series mature.
Major issuers still trading
The bonds still outstanding and trading were issued primarily by:
- NHAI — National Highways Authority of India
- REC — Rural Electrification Corporation
- PFC — Power Finance Corporation
- IRFC — Indian Railway Finance Corporation
- HUDCO — Housing and Urban Development Corporation
- NABARD — National Bank for Agriculture and Rural Development
All are government-backed entities, which is part of why these bonds carry high credit quality — see PSU bonds vs corporate bonds for how that backing works in practice.
How to buy tax-free bonds in the secondary market
Since there's no primary issuance to subscribe to, buying today means purchasing an existing bond from another holder on the exchange:
- Open a demat and trading account with any SEBI-registered broker, if you don't already have one.
- Search for the issuer on BSE or NSE and identify the specific ISIN — different maturities and series from the same issuer trade as distinct securities with different prices and yields.
- Place a limit order in the cash segment at your chosen price, or route through a SEBI-registered Online Bond Platform Provider (OBPP) that lists the bond.
- The trade settles into your demat account like any listed security.
Use the screener to search current listings by issuer name and compare available ISINs, prices, and yields side by side.
Why your real yield is lower than the printed coupon
This is the part most lists of tax-free bonds skip. These bonds were issued with coupons in the 7.5%–9% range, reflecting the interest-rate environment of 2012–2016. Because their interest is tax-free, demand from higher-tax-bracket investors has consistently pushed their secondary-market price above face value — often to a meaningful premium.
Worked example: a bond with an 8% coupon on ₹100 face value, trading today at ₹135, still pays ₹8 per year in interest — but ₹8 on a ₹135 purchase price is a current yield of about 5.9%, not 8%. Factor in that you'll only get back ₹100 at maturity despite paying ₹135, and the yield-to-maturity compresses further. The tax-free status still makes the effective pre-tax-equivalent yield attractive for high-slab investors, but the printed coupon on the bond is not the return you'll actually earn buying it today.
Tax treatment: interest vs capital gains
The interest you receive is tax-exempt under Section 10(15) — that part doesn't change. But if you sell the bond before maturity, or it matures and you'd bought at a premium, the difference between your purchase price and the redemption/sale price is treated as a capital gain or loss, and capital gains on tax-free bonds are taxable — the exemption covers interest income only, not capital gains. See bond taxation in India for how listed-bond capital gains are taxed.
Key takeaways
- No new tax-free bonds have been issued in India since 2016 — every bond available today is secondary-market stock from that earlier period.
- Buy through a demat account via BSE/NSE by ISIN, or through a SEBI-registered OBPP.
- High demand for the tax-free status has pushed most of these bonds to trade at a premium to face value — your actual current yield is materially below the printed coupon.
- Only interest is tax-exempt under Section 10(15); capital gains on sale or premium-priced maturity are taxable.
Related reading: How bonds are taxed in India · PSU bonds vs corporate bonds · Search tax-free bonds on the screener →