The government on Wednesday clarified that the bonds that infrastructure finance companies have been allowed to issue in the next financial year would not have a tax-free status.

“These bonds will not be tax-free. Tax-free bonds distort the market,” secretary in the department of economic affairs Shaktikanta Das said here.

He said there is no proposal for allowing issue of tax-free bonds pending with the government.

Interest income on tax-free bonds is not taxed. However, capital gains arising out of trading of these bonds are subject to tax. Money invested in these bonds is not eligible for deduction from taxable income.

For the 2016-17, the government has announced in the budget that to augment infrastructure spending further it will allow six state-run companies to raise Rs 31,300 crore through bonds.

Of the total, National Highway Authority of India (NHAI) will raise Rs 15,000 crore through issue of bonds.

Other entities that will be allowed to raise funds through bonds include Power Finance Corporation, Rural Electrification Corporation, Indian Renewable Energy Development Agency, Nabard and the Inland Water Authority.

In 2015-16, these companies had been given permission to raise Rs 40,000 crore through tax-free bonds. It was done after a gap of year. Now again tax-free bonds would not be allowed.