Tax-Exempt Security


DEFINITION of 'Tax-Exempt Security'

A security in which the income produced is free from federal, state and local taxes. Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality. For some investors, U.S. savings bond interest may also be free from federal income taxes.

BREAKING DOWN 'Tax-Exempt Security'

Depending on where the investor lives, a tax-exempt security may be free from all taxes. An in-state resident will usually receive a state and federal tax exemption on general obligation bonds from his or her home state.

A tax-exempt security will carry a tax-equivalent yield that is often higher than the current yield, as determined by the investor's tax bracket. The higher the tax bracket, the more beneficial tax-exempt securities can become in a taxable investment account.

  1. U.S. Savings Bonds

    A U.S. government savings bond that offers a fixed rate of interest ...
  2. Unlimited Tax Bond

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  3. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  4. Tax-Equivalent Yield

    The pretax yield that a taxable bond needs to possess for its ...
  5. Bond Laddering

    A portfolio management strategy and model for investing in fixed ...
  6. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic ...
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