Skip to main content

Tax free bonds are good for risk averse investors

Buy Gold Mutual Funds

Invest Mutual Funds Online

Download Mutual Fund Application Forms

Consider returns, liquidity and safety before investing

TAX free bonds issued by government-promoted infrastructure development companies, will hit the markets again this year to raise Rs 60,000 crore, as announced in the Union budget. Last financial year, the National Highway Authority of India (NHAI), Power Finance Corporation (PFC), Rural Electrification Corporation (REC), Housing and Urban Development Corporation (Hudco) and Indian Railway Finance Corporation (IRFC), raised Rs 30,000 crore through this route.


Consider risk appetite: Risk-averse investors can consider tax-free bonds as a viable option to park their money. Going by the 10year benchmark yield at 8.16 per cent now, these bonds are likely to have 8 per cent to 8.50 per cent interest rate this year. Investors should consider all aspects, such as returns, liquidity and safety before investing in such new instruments.

In a tax-free bond, the tax advantage is not on the principal investment amount that in some instruments, such as public provident fund, can be deducted from the total income. The tax advantage in a tax-free bond is on the interest. The interest earned on the tax-free bonds is not added while calculating personal income tax. The interest is paid annually on a fixed date every year.


Matter of interest: A taxfree interest of 8 per cent and above is higher than bank fixed deposits (FDs), where 10-year rates of 9.75 per cent may fetch higher gross returns, but, post-tax returns for investors in the 30 per cent tax bracket will be lower because they will have to pay 30 per cent tax on the bank interest income. If an investor, in the 30 per cent tax bracket, invests, say, Rs 50,000 in a 8 per cent tax-free bond, he gets Rs 4,000 tax-free interest every year, but, the interest earned on reinvesting it will be taxable at 30 per cent. These reinvestments, whether in a bank FD or in other fixed income instruments, will be at in terest rates prevailing in the future, which may be higher or lower than the present rates.

In a 10-year bank FD paying 9.75 per cent, the reinvestments of interest will take place at 9.75 per cent, though the interest earned on them will continue to be taxable at 30 per cent for the same investor.


Thus, if interest rates prevailing in the future are far lower than the present rates, then, the bond investor's returns at the end of 10 years, after reinvesting the tax-free interest at those low rates, may not surpass bank FD returns.


Key differentiators with FDs: Unlike in bank FDs, liquidity could be a problem in tax-free bonds, even though they are listed on stock exchanges. The traded bonds may not see enough buyers and sellers, and even otherwise, they may fetch you a market rate lower than the intrinsic value of your bond since interest rates may have fallen by then.

In terms of safety, these bonds may have an AAA rating now, but, there is no guarantee that it won't be downgraded later and pose a risk to your principal amount. 

 

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

    1. Largecap Funds        Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds     Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds    Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds             Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds              Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Gold Mutual Funds             Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

 

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...
Read more

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...
Read more

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...
Read more

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...
Read more

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now