Municipal bonds, aka munis, are the main type of tax-exempt bonds.
Munis are issued by states, counties, cities, and other government agencies to fund major capital projects, such as building schools, hospitals, highways, and other public buildings.
Interest income from muni bonds is generally not subject to federal income taxes. It can also be exempt from state or local income taxes if your home state or city issues the bond. Interest income from muni bonds issued by another state or city is taxable on your state or local income tax return.
Fast fact: Muni bonds exempt from federal, state, and local taxes are known as triple tax exempt.