What are Municipal Bonds in India? An Easy Guide

• Issued by Urban Local Bodies (ULBs) or local governments, municipal bonds are a safe debt instrument, making them attractive if you are a conservative investor.

• There are two types of municipal bonds: Revenue Bonds and General Obligation Bonds. 

• If conditions are met, municipal bonds can be tax-free, helping you reduce tax liability while earning stable interest income. 

• Though safer than corporate bonds, municipal bonds have low liquidity, and there's a slight risk of default.

There are many investment options in India, and some are offered or backed by the government, making them a secure option. One such option is municipal bonds. Municipal bonds in India are popular among low-risk investors and those looking to save tax,.

As per the guidelines issued by SEBI, the local government can also issue these bonds to raise funds for various projects. This is why they are also known as local government bonds. Read on to learn more about these bonds, their benefits, how to invest, and more.

These bonds are debt securities and are issued by local governments. Local corporations issue these bonds to raise funds for daily operations or projects like highways, schools, sewage systems,etc. 

When you invest, you are loaning the amount to the body issuing the bond. For this, you get interest on a regular basis until maturity. When the term ends, you get your investment back. However, these bonds do not enjoy sovereign guarantee or the backing from the Union or state governments. 

Revenue and general obligation are the two types of municipal bonds in India that you can choose from. Here is an overview:

• Revenue: These are issued to raise funds for a specific project, and repayment is made from the revenue generated through the projects.

• General Obligation: These are issued to raise funds for general projects and repayment is made from the revenue generated through other projects and taxes.

To make an informed decision, you need to know the pros and cons of local government bonds. Here are some of them:

Benefits

• Low Risk

Since these are issued by Urban Local Bodies (ULBs) and local governments, they are safer than some other options, such as corporate bonds that have high credit risk.

• Tax Advantages

Municipal bonds can also be tax-free bonds in India if certain conditions are met. For instance, interest earned from these bonds enjoy tax exemption. 

• Steady and Attractive Gains

Municipal bond returns depend on the interest rate, which is generally better than some other low-risk options. Additionally, the return you get is stable, which allows you to add to your income.

Disadvantages

• Low Liquidity

Municipal bonds are not as actively traded, so you may not be able to sell them quickly or at the desired prices. So, your access to capital is restricted.

• Credit Risk

Though municipal bonds in India don’t default as often, it is still a possibility. However, you can take a calculated risk with thorough research and analysis of the issuing body’s financial profile.

There are a few things you should keep in mind to ensure you make the right decision and achieve your goals. Here are some of them:

• Assess the credit rating of the bond through credit ratings agencies or financial news distributors

• Analyse your risk tolerance, as these bonds carry some risk of default and call

• Evaluate your investment horizon, as these bonds have a lock-in period

• Stay updated with regulations to ensure the security of your funds

• Diversify your investment to minimise the risk

• Consider the tax implications, if any, to plan your finances accordingly

Investments are crucial to secure financial growth, but you must employ a smart strategy to keep your funds and their growth secure. One of the best ways to do that is through portfolio diversification. 

Here, you invest in different avenues of different asset classes. This allows you to capitalise on the market fluctuations while minimising its risk. You should also use online tools and consult a professional to ensure your strategy aligns with your goals.

1. Are municipal bonds in India tax-free?

Yes, municipal bonds are one of the tax-free bonds in India. However, the tax exemption is only applicable if the investor adheres to the prescribed rules and regulations. 

2. How do I find credit ratings for local bonds?

You can find the credit ratings of local government bonds through financial news and data providers. You can also check them through the websites of credit rating agencies in India, which are:

• ICRA

• CRISIL

• Ind-Ra

• Care

3. Can I sell municipal bonds before maturity?

Yes, you can sell your bonds before the end of the term on the secondary market. However, you will incur some charges, such as commission or brokerage fees. It is important to consider these because they impact your overall returns.

4. Are municipal bonds suitable for short-term goals?

Yes, but it depends on the period of the fund. Municipal bonds in India come with varying terms, so you need to choose one that aligns with your short-term goals.

5. How do municipal bonds differ from corporate bonds?

Corporate bonds are issued by corporations and can give better returns but have a higher credit risk. Municipal bond returns may be lower, but they offer better security.

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