If you’re interested in investing in tax-free municipal bonds, you may wonder if they’re really free of taxes. While the investment generally provides tax-free interest on the federal (and possibly state) level, there may be tax consequences. Here’s how the rules work. Purchasing a bond There are no immediate tax consequences if you buy a tax-exempt bond for its face amount, either on the initial offering or in the market. If you buy such a bond between interest payment dates, you’ll have to pay the seller any interest accrued since the last interest payment date. This amount is treated as a capital investment and is deducted from the next interest payment as a return of capital. Interest excluded from income Generally, interest received on a tax-free municipal bond isn’t included in gross income, although it may be included for alternative minimum tax (AMT) purposes. While tax-free interest is attractive, keep in mind that a mu...