Tax-free bonds in India allow investors to earn regular interest without paying income tax on eligible interest income. These bonds were mainly issued by government-backed organisations to fund infrastructure and development projects. Although fresh issues are generally unavailable, older bonds from issuers such as REC, NHAI and IRFC continue to trade in the secondary market. If you are exploring tax-free bonds in India 2026, it is important to understand their current returns, tax benefits and risks before investing. So, are they still worth considering?
Quick Answer:
Tax-free bonds in India allow investors to earn regular interest without paying income tax on eligible interest. In 2026, fresh issues are generally unavailable, but investors can still buy older bonds from issuers such as REC, NABARD, HUDCO, IRFC, IREDA and NHAI through the secondary market. Before investing, compare the yield to maturity, credit rating, market price and remaining tenure to assess whether they suit your financial goals.
Key Takeaways
- Tax-free bonds offer interest income that is exempt from income tax, subject to the conditions of the original issue. Most tax-free bonds available in India in 2026 are older issues from organisations such as REC, NABARD, HUDCO, IRFC, IREDA and NHAI.
- The coupon rate is not the only factor to consider. Yield to maturity (YTM), purchase price, credit rating and remaining tenure also matte
- Tax-free bonds are useful for investors in higher tax brackets who want regular income, but low liquidity and long maturity periods can be drawbacks.
What Are Tax-Free Bonds in India?
Tax-free bonds are fixed-income investments that pay interest exempt from income tax, subject to the conditions of the applicable tax law. They are generally issued by government-backed public sector organisations to raise money for projects such as highways, railways, housing and infrastructure development.
Unlike a regular bank fixed deposit, where the interest earned is generally taxable, eligible interest from tax-free bonds does not add to your taxable income. This makes them particularly relevant for investors looking for a regular income without an income-tax liability on the interest.
Suppose you invest an amount of ₹1 lakh in a tax-free bond that is offering an annual interest rate of 7%. You will earn an amount of ₹7,000 in interest every year. Since the interest qualifies for tax exemption, you will receive the full ₹7,000 without paying income tax on this amount. At the end of the bond’s tenure, you also receive your original investment of ₹1 lakh.
Are Tax-Free Bonds Still Worth It in India in 2026?
Yes, tax-free bonds can still be worth considering in 2026, particularly for investors in higher income-tax brackets who want a regular income. However, their appeal depends on the yield available at the current market price, the remaining maturity period and the ease of selling them.
There is one important difference in 2026, i.e., investors cannot rely on fresh tax-free bond issues. Most available options are older bonds issued by public sector organisations such as NHAI, REC, PFC and IRFC. Investors can look for these bonds in the secondary market through stock exchanges.
For example, CDSL’s bond trading records for 5 November 2026 show listed tax-free bonds from REC and NHAI, confirming that older issues continue to trade.
List of Tax-Free Bonds in India
To identify the best tax-free bonds in India in 2026, it is better to compare their yield to maturity (YTM), credit rating, market price and remaining tenure rather than their coupon rates alone. A bond with a higher coupon rate does not necessarily give a higher return. For example, if you buy a bond above its face value, your effective yield may be lower.
The following list of tax-free bonds in India includes some older issues that investors can compare in the secondary market. Based on available secondary-market data around 5 November 2026, the following are some tax-free bonds worth comparing.
| Issuers | ISIN (non-retail / retail) | Coupon rate
(non-retail) |
Coupon rate
(retail) |
Indicative YTM | Maturity date |
| REC | INE020B07JR0 / INE020B07JS8 | 7.09 | 7.34 | 5.20 | 5 November 2030 |
| NABARD | INE261F07057 / INE261F07032 | 7.35 | 7.64 | 5.20 | 23 March 2031 |
| HUDCO | INE031A07AR8 / INE031A07AT4 | 7.39 | 7.69 | 5.15 | 15 March 2031 |
| IRFC | INE053F07884 / INE053F07900 | 7.35 | 7.64 | 5.20 | 22 March 2031 |
| IREDA | INE202E07195 / INE202E07229 | 7.49 | 7.74 | 5.15 | 21 January 2031 |
| NHAI | INE906B07EO8 / INE906B07EP5 | 7.39 | 7.69 | 5.15 | 9 March 2031 |
Rural Electrification Corporation Ltd (REC)
Rural Electrification Corporation (REC) is a public sector financial institution that lends for power generation, transmission and distribution projects in India. Its tax-free bond (ISIN INE020B07JS8) was issued on 5 November 2015 and matures on 5 November 2030. REC’s filing with NSE lists its coupon as 7.09/7.34%, with 7.34% applying to the retail category. A sister bond (ISIN INE020B07JR0) pays 7.09%. The bond pays interest annually, and eligible interest income is exempt from income tax, subject to applicable conditions.
National Bank for Agriculture and Rural Development (NABARD)
The National Bank for Agriculture and Rural Development (NABARD) supports agriculture, rural businesses and infrastructure by providing financial assistance to banks and other institutions. Its 15-year tax-free bond matures on 23 March 2031. It carries a 7.35% coupon for non-retail investors (Series IIA) and 7.64% for retail investors (Series IIB). Interest is paid annually and is tax-exempt, subject to conditions.
Housing and Urban Development Corporation Ltd (HUDCO)
Housing and Urban Development Corporation (HUDCO) finances housing and urban infrastructure projects, including roads, water supply and sanitation. Its tax-free bond (face value ₹1,000) matures on 15 March 2031. It carries a 7.39% coupon for non-retail investors (Series 2A) and 7.69% for retail investors (Series 2B). The bond has a face value of ₹1,000 and provides eligible tax-free interest income.
Indian Railway Finance Corporation Ltd (IRFC)
The Indian Railway Finance Corporation (IRFC) raises funds for railway infrastructure, locomotives, coaches and other railway assets. Its tax-free bond matures on 22 March 2031. It carries a 7.35% coupon for non-retail investors and 7.64% for retail investors. Investors receive fixed interest income, which is exempt from income tax subject to applicable conditions.
IREDA Tax Free 2031
The Indian Renewable Energy Development Agency (IREDA) lends to renewable energy projects such as solar, wind and hydropower. Its tax-free bond maturing on 21 January 2031 carries a 7.49% coupon (INE202E07195) for non-retail investors and 7.74% (INE202E07229) for retail investors. The bond allows investors to earn eligible tax-exempt interest while the funds support renewable energy development.
National Highways Authority of India 2031 (NHAI)
The National Highways Authority of India (NHAI) develops and maintains national highways. Its tax-free bond maturing on 9 March 2031 carries a 7.39% coupon for non-retail investors (Series IIA) and 7.69% for retail investors (Series IIB). Investors receive fixed interest payments, which qualify for income-tax exemption subject to the applicable conditions.
Tax Benefits of Investing in Tax-Free Bonds
The main tax benefit of tax-free bonds is that eligible interest income is exempt from income tax. This means you receive the interest without paying tax on it, subject to the conditions of the bond’s original notification.
- Tax-free interest income: If you invest ₹1 lakh in a tax-free bond paying 7% annual interest, you receive ₹7,000 a year. If the bond qualifies for the exemption, this interest is excluded from the taxable income.
- No tax deduction needed to claim the interest exemption: The benefit comes from the bond’s notified tax status. You do not need to claim a separate deduction for the interest.
- Potentially better post-tax returns: Since the interest is tax-exempt, the amount you keep may be higher than what you would earn from a taxable bond offering the same interest rate.
Tax-Free Bonds vs Tax-Saving Bonds in India
Tax-free bonds and tax-saving bonds offer different tax benefits. Tax-free bonds provide tax-exempt interest, while tax-saving bonds, such as 54EC capital gains bonds, can help eligible investors save tax on long-term capital gains from selling land or a building.
| Basis | Tax-free bonds | Tax-saving bonds |
| Main purpose | Earn interest that is exempt from income tax | Claim exemption on eligible long-term capital gains |
| Tax benefit | Eligible interest income is tax-free | Eligible capital gains invested in specified bonds can be exempt, subject to conditions |
| Suitable for | Investors who want tax-free interest income | Investors who have eligible long-term capital gains from selling land or a building |
| Lock-in period | Depends on the bond’s maturity and terms | Five years |
| Interest earned | Exempt from tax if the bond qualifies | Taxable as per the investor’s applicable tax rules |
Conclusion
Tax-free bonds in India 2026 can still be worth considering if you want regular interest income without an income-tax liability on eligible interest. However, the return you earn depends on the price at which you buy the bond, its YTM and the time remaining until maturity.
Before investing, compare bonds from issuers such as REC, NABARD, HUDCO, IRFC, IREDA and NHAI. Also, check their credit ratings, payment terms and trading volumes. Remember that tax-free interest does not mean every return from the bond is tax-free. Any capital gain from selling a bond may have separate tax implications.
Ultimately, tax-free bonds may suit investors looking for predictable income over a longer period. However, compare their post-tax returns with bank FDs and other fixed-income options before investing.
FAQs
Q: Are tax-free bonds available in India in 2026?
Ans: Fresh tax-free bond issues are generally not available in India in 2026. Most original public issues have closed. However, investors can still buy eligible older tax-free bonds through the secondary market on stock exchanges. Some examples include bonds issued by REC, NHAI, HUDCO, NABARD and IRFC. Availability depends on whether existing investors are willing to sell.
Q: Which are the best tax-free bonds in India?
Ans: There is no single best tax-free bond for every investor. Some listed options worth comparing include REC, NABARD, HUDCO, IRFC, IREDA and NHAI tax-free bonds. Before choosing one, compare its yield to maturity (YTM), credit rating, market price, remaining maturity and trading volume. A higher coupon rate does not always mean a higher return.
Q: Are tax-free bonds better than bank FDs?
Ans: Tax-free bonds may offer better post-tax returns than bank FDs for investors in higher income-tax brackets. This is because eligible interest from tax-free bonds is exempt from income tax, while FD interest is generally taxable as per the investor’s applicable tax slab.
Q: Can I buy tax-free bonds directly without a broker?
Ans: Yes, you can buy tax-free bonds through a stockbroker using a demat and trading account. Search for the bond by its name or ISIN on the exchange and place a buy order if sellers are available.
Q: Who should invest in tax-free bonds?
Ans: Tax-free bonds may suit investors in higher income-tax brackets who want a regular income without paying tax on eligible interest. They are also suitable for investors who can keep their money invested for several years and do not need immediate access to it. Retired individuals looking for predictable interest income may also consider these bonds.
