Tax-Free Bonds India 2026: Why These NHAI, PFC & REC Bonds Still Beat FDs for the 30% Tax Bracket
By Nitish Bharadwaj · Published Aug 26, 2026 · 6 min
Tax-free bonds from NHAI, PFC, REC, IRFC, and HUDCO haven't been issued since FY2015-16, and no new tranche is authorised for FY2026-27 — but the original bonds still trade on the NSE and BSE, carrying fixed coupons of 7.15%-8.71% and remaining fully tax-exempt under Section 10(15)(iv)(h) until maturity. Most now trade at a premium to face value, compressing the effective yield to roughly 5%-5.5% — still equivalent to a 7%+ taxable FD return for someone in the 30% bracket. This guide covers current yields, the premium-pricing trap, and how to buy them.
No tax-free bond has been issued in India since the government's last tranche in FY2015-16 — and as of August 2026, there's still no notification authorising a fresh one for FY2026-27. Yet a market for these bonds is very much alive: the original NHAI, PFC, REC, IRFC, and HUDCO issues from 2012-2016 continue to trade on the NSE and BSE, and their interest remains completely tax-free for whoever holds them today. Here's what they actually pay now, and where the yield gets eaten before it reaches you.
Why Tax-Free Bonds Stopped Being Issued
The government used tax-free bonds heavily between FY2011-12 and FY2015-16 to fund infrastructure — NHAI, PFC, REC, IRFC, HUDCO, NTPC, and IIFCL among the issuers — offering interest exempt under Section 10(15)(iv)(h) in exchange for a lower coupon than a comparable taxable bond would have carried. No fresh tranche has been floated since FY2015-16, largely because the tax-exemption route lost favour as a funding tool once taxable infrastructure bonds and market borrowing became cheaper for issuers to service. Nothing has changed for FY2026-27: the only way to own one today is to buy an existing bond in the secondary market.
What They Actually Yield Today
The original coupons on these bonds — locked in when they were issued a decade or so ago — ranged from about 7.15% to 8.71%, and every rupee of that interest is still tax-free. But because these are fixed, high-coupon bonds trading in a market where interest rates have moved around since 2016, most now trade above their ₹1,000 face value. Paying a premium to buy the bond lowers your actual return, because you're paying more upfront for the same fixed interest and the same maturity payout.
| Issuer | Original Coupon | Typical Secondary-Market Price* | Approx. Effective Yield (Tax-Free) |
|---|---|---|---|
| NHAI | 7.35%–8.30% | ₹1,150–₹1,250 | ~5.0%–5.5% |
| PFC | 7.18%–8.67% | ₹1,120–₹1,240 | ~5.2%–5.8% |
| REC | 7.22%–8.71% | ₹1,130–₹1,230 | ~5.3%–5.9% |
| IRFC | 7.15%–8.10% | ₹1,140–₹1,220 | ~5.0%–5.5% |
| HUDCO | 7.39%–8.20% | ₹1,100–₹1,200 | ~5.5%–6.0% |
*Indicative — actual prices move with each trade and vary by remaining tenure; check live quotes on the NSE/BSE or a bond platform before buying.
How the Tax Exemption Still Works
Interest on these bonds is exempt under Section 10(15)(iv)(h) of the Income Tax Act — a benefit that attaches to the bond itself, not the original investor. Buy one today from someone who first bought it in 2015, and you still get tax-free interest for as long as you hold it, right up to the bond's original maturity date — most of these mature between 2026 and 2036, depending on the original 10, 15, or 20-year tenure. No TDS is deducted on the interest, and it isn't added to your taxable income, though it still needs to be disclosed as exempt income when you file your ITR.
Tax-Free Bonds vs Bank FD vs RBI Floating Rate Bonds
For someone in the 30% tax bracket, a 5.5% tax-free yield is equivalent to roughly a 7.9% taxable return — comfortably ahead of what most bank FDs pay today. But the comparison isn't one-sided. RBI Floating Rate Savings Bonds pay a much higher headline rate — 8.05% for July-December 2026 — but offer no tax break at all, and the bond is fully illiquid for seven years. Bank FDs sit in between: reasonably liquid with a modest penalty, but the interest is taxed just like the RBI bond. Worth running the actual post-tax numbers before picking either over a tax-free bond.
How to Buy Tax-Free Bonds
- Open a demat account with any broker — the same one you would use for stocks or Sovereign Gold Bonds.
- Search the issuer's ISIN on the NSE or BSE debt segment, or use a bond platform that lists live tax-free bond quotes and yields.
- Check the yield to maturity, not the coupon — this is the number that reflects your actual return after the premium.
- Confirm the remaining tenure — some of these bonds mature within the next two to three years, others run out to 2036.
- Place the order through your broker like any other bond or stock purchase; settlement follows the usual cycle.
Who Should Actually Buy These
- High tax-bracket investors who have already used up their annual investment limits elsewhere and want additional tax-free income without a fresh lock-in.
- Retirees who want predictable, tax-free income and don't mind lower liquidity than SCSS, which is easier to buy but capped at ₹30 lakh combined for a couple.
- Not for anyone needing liquidity in the next one to two years — thin trading volumes on these bonds mean you may not get a fair price if you need to sell in a hurry.
- Not for lower tax brackets — the post-tax return on a plain bank FD or a small savings scheme often works out better once you account for the premium you're paying to buy in.
Bottom Line
Tax-free bonds are a shrinking, closed universe — no new issuance is coming, and every year that passes, fewer of the original 2012-2016 tranche remain outstanding as bonds mature. For a 30% bracket investor willing to navigate a semi-liquid market and check the yield to maturity before buying, they still offer one of the few genuinely tax-free fixed-income returns available in India today. For everyone else, a laddered FD, the RBI Floating Rate Savings Bond, or SCSS if you qualify is simpler and just as competitive after tax.