ARE TAX-FREE BONDS, BEING ADVERTISED NOW, SUITABLE FOR YOU?
When we sent a promotional mail to our subscribers few days back, we received a good response for these bonds including from some very young persons. We quizzed some of them and found that they really did not understand the actual nature of these bonds. We were actually able to dissuade some of them not to apply for them while rang up some older subscribers to get to subscribe to them. Given below are clarifications on what are these bonds and to help you decide if they are for you:-
What is the Buzz about these Bonds?
This financial year (FY 2013-14), the Govt has allowed Nine Public Sector Units (PSUs) to issue tax-free bonds totalling Rs 48,000 Crores. Rural Electrification Corporation (REC) has already finished with one such offering, while HUDCO (Housing and Urban Development Corporation) is in the market with their issue currently. Others will also come subsequently during the Financial Year.
So, What Tax-rebate do I get on applying for these bonds?
There is no tax-rebate on application! You have to understand the difference between getting a tax rebate on application and a tax-free interest. In these bonds, all the interest you get is always tax-free but there is no tax-rebate on the application amount. This is very different from the Infrastructure bonds that came in FY 2011-12 which got you tax exemption on application amount up to Rs 20,000 under IT Act Section 80CCF but then their interest was fully taxable.
How good is the interest we would generally get on these bonds?
The interest, which is assured for the bond period that you subscribe for, is 8.39% for 10 year bond, 8.76% for 15 year bond and 8.74% for 20 year bond on the HUDCO bonds on offer presently. To get such a good assured interest for long periods from a PSU with a high credit rating is a very good preposition. You can expect similar rates from other issues too.
Are they suitable for me then if everything is so good about them?
You will have to keep a few things in mind when you apply for these bonds. Firstly, there is no cumulative interest option – you will get the interest compulsorily every year. Secondly, they may or may not be saleable in the open market if you wish to exit them later. If general market interest rates are high when you want to exit, market price of these bonds may be quoted low. Of course, if general interest rates are low, you will get a good market price. On the other hand, their interest rate is very attractive; you can buy bonds for as low as Rs 5000 and in multiples of Rs 1000 thereafter; as there is no tax on interest, there is no TDS applicable on them; and they are only being allowed to be issued by PSUs which have very healthy financial position.
You haven’t told me whether they are suitable for me…
To our mind, they are suitable only for people who need an additional regular income. Thus, if you are planning to use it to meet a big financial goal later or going in for it only because of good tax-free interest while you actually do not need this additional recurring yearly income, this avenue may not be for you. However, if you are retired or retiring or do need to supplement your current income on a regular basis, these bonds are excellent safe investments. Of course, yearly income issue (as opposed to monthly income) should not deter you since the annual interest received can always be parked in a Liquid Mutual Fund and a Systematic Withdrawal Plan (SWP) set up to give you a safe and regular monthly income.
Are these bonds better than long-term bank FDs where I have put my money?
The returns in fact come out far better than Bank FDs. Eg, SBI currently gives 9% interest (9.25% for senior citizens) on its bank FDs for period between 5-10 years (maximum period is 10 years). For a senior citizen who is in the 20% tax category (annual income between Rs 5 – 10 Lakhs), the effective rate of interest after tax comes out to be 7.34% only on such FDs. For non-senior citizens, it is even lesser. Compare this with the 8.39% to 8.74% interest being given by these bonds.
Col (retd) Sanjeev Govila, CERTIFIED FINANCIAL PLANNERCM, CEO,
Hum Fauji InitiativesTM, Your Long-term Partner for Wealth Creation
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