AAA Rated Bonds

AAA-rated bonds are a debt instrument representing the highest degree of safety in terms of interest and principal repayment. These bonds fall under the category of investment grade bonds, i.e, bonds having credit ratings of AAA to BBB. These bonds are known as low risk bonds, as their highest credit rating indicates minimal default risk in terms of timely repayment of debt. Due to this lower risk, issuers offer lower yields than bonds carrying higher credit risk.

Capital Gain Bonds

Capital Gain Bonds allow investors to claim tax exemption on the Long Term Capital Gains (LTCG) arising from the sale of immovable property (being land or/and building).

Rural Electrification Corporation (REC) and Indian Railway Finance Corporation Limited (IRFC) issue capital gain bonds at a fixed return of 5.25% p.a. These public sector companies hold the highest credit rating of AAA by CRISIL and ICRA. However, capital gain bonds are not listed and, therefore, cannot be traded in the secondary market.

Tax Free Bonds

Tax free bonds offer tax benefits under Section 10 of the Income Tax Act. The interest income earned from tax free bonds is exempt from income tax, helping investors falling under the higher tax brackets retain more of their returns. 

Public Sector Undertakings (PSUs) such as National Highways Authority of India (NHAI), Housing and Urban Development Corporation (HUDCO), Indian Renewable Energy Development Agency (IREDA), etc., issue tax free bonds to fund infrastructure and development projects. The issuers are usually rated AAA by credit rating agencies like CRISIL, CARE, etc., providing a low risk of default. These bonds are listed and therefore an investor can buy and sell tax free bonds in the secondary market.

Investors can invest in listed bonds either through the primary market or the secondary market. In a primary market, investors can buy bonds directly from the issuer during the initial offer period. In the secondary market, investors can buy that bond directly from its existing investors through the stock exchange(s). Retail investors can purchase and sell AAA-rated bonds through registered stock brokers and OBPP (Online Bond Platform Providers).

Alternatively, investors can also buy AAA-rated bonds through Paisabazaar and earn fixed returns of up to 13.25% p.a.

How to buy AAA-rated bonds through Paisabazaar

You can purchase AAA bonds through Paisabazaar’s website or mobile app. To start investing, simply follow the steps below:

Step 1: Login to your Paisabazaar account by downloading the app or through website

Step 2: Select the bond after comparing yield (YTM), credit rating and investment amount

Step 3: Complete the KYC process. Keep your Aadhaar and PAN Card handy

Step 4: Enter bank details for AAA bond purchases, receiving interest and payouts

Step 5: Link your demat account to receive the bond directly to that account.

The interest income of the AAA-rated bond is fully taxable as per the individual’s income tax slab. Note that the interest income of tax free bonds issued by NHAI, REC, PFC, etc are tax free. 

Further, if an investor sells a bond before the maturity date at a higher price, the capital gains arising from the sale are subject to capital gains tax. Short Term Capital Gains (STCG), i.e., gains arising within 12 months of the bond purchase, are taxed at the slab rate of the individual. Long term capital gains (LTCG), gains booked after 12 months of bond purchase, are taxed at 12.5% for listed bonds.