Bangalore: Though initially the interest income on the tax-free bonds were designed to lure investors to invest in the long- term investment in infrastructure but now some smart investors are taking advantages of 'dirty pricing' on exchanges of these tax free bonds in the secondary market. The interests earned on these bonds are non-taxable but when sold in the secondary market, the capital gains are taxable.

As per the income tax rules, the interest earned on bank fixed deposits are added along with the investor's income and taxed as per income tax categories. For example if a person is about to earn 8.5 percent interest annually on his bank fixed deposit he will actually earn 5.9 percent interest after paying tax in the 30 percent tax bracket. But in case of the tax-free bonds the interest earned are not taxed and investors can earn better post-tax returns as compared to fixed deposits.

In the year 2012 the companies who were permitted tax-free bonds raised around 20, 000 crore with coupon rates reigning from 8.1 percent to 8.3 percent. Investors have been trading these bonds both Over The Counter (OTC) and exchange platforms on 'Dirty Price' basis. 'Dirty price' includes both acquired and accumulated interest from the last interest payment date till the transaction date.

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