Definition of Tax-Exempt Sector

Financial securities that pay tax-free interest are known as tax-exempt sector. The most common example of tax exempt sector is non-profit organizations, these organizations are tax-exempt.

Explanation of Tax-Exempt Sector

Investors in tax exempt sector may face other risks like credit risk, interest rate risk, market risk etc. There are some instruments that are less risky like municipal bonds because their issuers are often more financially stable.

There is no tax to be paid on gifts since they are tax exempt.

Example

Suppose Mr. X wants to pay less tax. So he could invest in mutual funds as these funds invest in variety of instrument in tax-exempt sector. This helps him to diversify his investments but maintain a tax free portfolio.