What are Municipal Bonds, how does the common man benefit from them?

Municipal bonds help local governments raise money for infrastructure development. Investors get tax-free interest. The first bond in India was issued by Bengaluru in 1997. Recently Prayagraj, Wa…read more

New Delhi. The history of municipal bonds in India begins in 1997, when Bengaluru Municipal Corporation issued the first municipal bond. After this, cities like Ahmedabad and Nashik also took steps in this direction. The main purpose of municipal bonds is for local governments to raise financial resources for public projects. Recently, Prayagraj, Varanasi and Agra Municipal Corporations of Uttar Pradesh issued bonds worth Rs 150 crore.

Municipal bonds help local governments raise funds needed for infrastructure development. These are used for projects like schools, hospitals, roads, and water supply. Investors receive regular income from these bonds in the form of interest (coupons), which is usually tax-free.

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Type
Municipal bonds in India are mainly divided into two categories:
General Obligation Bonds: These are issued by local governments and are repaid from general tax revenues.
Revenue Bonds: These depend on the revenue generated from specific projects.

Benefits for investors
Tax-free interest: The interest earned on most municipal bonds is tax-free.
Low risk: They have lower default risk than corporate bonds.
Transparency: These are rated by agencies like CRISIL, which helps investors in taking decisions.

Challenges
Although municipal bonds offer many benefits, there are also some challenges.
Investor confidence: The weak financial condition of urban agencies and lack of management has affected investor confidence.
Non-availability of authentic financial data: Doubts on local bodies have reduced investor interest.