"Investors are showing both the premium on bonds and the accrued interest on these bonds as tax-free income. This has become a grey area" said a Senior Treasury Official from a Private Bank, as quoted by Business Standard.

The contract note for the trades in the equity segment shows only single price comprising both accrued interest as well as premium price. The investors file both the interest price and premium price together due to which the entire amount becomes non-taxable and amplify their returns on these tax-free bonds.

"There is lot of ambiguity and some retail investors are taking advantage of this" said Dheeraj Nigam, Vice President, Bajaj capital, Business Insider quoted. Suggestions have been made by market participants to the Exchanges to rectify the loophole and take up corrective measures.

"As per tax law, any premium on sale of these bonds within 365 days of purchase is added to the gross income and taxed at rates applicable to the individual. By showing the entire proceeds as income from tax-free bonds, they are escaping tax payable on the premium," added Nigam.

It is assumed that by March 2013 companies like Rural Electrification Corp, Power Finance Corp, IIFCL, Hudco, NHAI, NHB and IRFC will raise at least around 50,000 crore in all, by issuing tax free bonds.

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