(a) Tax-Saving Bonds and
(b) Regular Income Bonds.
Tax-Saving Bonds offer tax exemption up to a specified amount of investment. Examples are:
a) ICICI Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
b) NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act, 1961
c) RBI Tax Relief Bonds
Regular-Income Bonds, as the name suggests, are meant to provide a stable source of income at regular, pre-determined intervals.
Similar instruments issued by companies are called debentures. Bonds are usually not suitable to achieve capital appreciation. Sometimes, an investor buys bonds at a lower price just before a decline in interest rates, and the subsequent drop in the interest rates leads to an increase in the price of the bond, thereby facilitating capital appreciation.
Bonds are suitable for regular income purposes. Depending on the type of bond, an investor may receive interest semi-annually or even monthly, as is the case with monthly-income bonds. Depending on one’s capacity to bear risk, one can opt for bonds issued by top-ranking corporate, or that of companies with lower credit ratings. Usually top ranking corporate offer lower interest on bonds as compared to companies with lower credit ratings.
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