Reporting tax free bonds in schedule ei of itr-2

1) Does anyone know if it should be declared as interest income or dividend income?

Bonds are interest bearing - hence it should be filled in interest income head.

2) Do these incomes raise the tax bracket of the taxpayer? 

No this does not effect the tax bracket of a tax payer.

However the Income Tax Department has introduced section 14A for disllownace of expenses in relation to earning exempt income. - Just for your information. If applicable.