Municipal Bonds: Definition, Types, Risks, and Tax Benefits

 

What are Municipal Bonds?

Municipal bonds are debt obligations issued by local governments such as cities, counties, and school districts to fund general public projects such as infrastructure, schools, and hospitals. The majority of municipal bond interest is exempt from federal income taxes and, in some cases, state and local taxes.

Municipal bonds provide investors with a consistent source of income in addition to tax advantages. Municipal bonds in India typically pay interest twice a year, and the issuer is required to make payments to bondholders in accordance with the terms of the bond’s indenture. Municipal bonds can come in various maturities, from short-term to long-term, allowing investors to adapt their investments to their personal needs. 

What Are The Types of Municipal Bonds in India?

Investors can select from a variety of municipal bonds, each with its own set of features and benefits. The following are the most prevalent forms of municipal bonds:

  1. General Obligation Bonds (GO Bonds): Municipal bonds are guaranteed by the government and are usually utilised to finance projects that benefit the entire community, such as schools, roads, and public buildings. GO bonds are considered one of the safest municipal bonds since the issuing municipality can raise taxes or cut spending to pay its debt obligations.
  1. Revenue Bonds: These are backed by the revenues generated by a specific project or facility, such as a toll road, airport, or water treatment plant. Revenue bonds are considered riskier than GO bonds because their repayment depends on the success of the underlying project or facility.
  1. Taxable Municipal Bonds: These bonds are issued by municipalities but are subject to federal income tax. They are typically used to finance projects that do not qualify for tax-exempt status, such as sports stadiums or convention centres.
  1. Insured Municipal Bonds: These bonds are backed by an insurance policy issued by a third-party insurer, which guarantees the timely payment of principal and interest even if the issuer defaults. Insured municipal bonds are considered to be less risky than non-insured bonds.

    Read Full - Municipal Bonds


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