State Bank of India (SBI), India's largest lender, has come out with a Series 1 and Series 2 Lower Tier-II bonds having a face value of 10,000. Though the issue was closed on October 25, you can purchase it from the stock market as the bonds have been listed on the National Stock Exchange (NSE). Outlining the bank's plans, SBI chairman O.P. Bhatt said: "We intend to do more such issues, maybe, every quarter. We will create a secondary market for these issues so that exit becomes easy and price discovery takes place."
Company background
SBI's origin dates back to 1806. Today, it's India's largest bank, with more 12,500 branches. The lender has more than 140 international offices in over 30 countries. Its customer base was over 153 million as on 31 March 2010. The bank reported a consolidated net profit of Rs 3,365 crore for the period ending 30 June 2010, a rise of 22 per cent year-on-year.
Product features
- Series 1 Lower Tier-II bonds will earn you an interest rate of 9.25 per cent, and have a tenure of 10 years;
- The bank offers an interest of 9.50 per cent for the Series 2 Lower Tier-II bond. The tenure of these bonds would be 15 years;
- Trading, of the bond will be in demat form;
- The minimum investment is Rs 10,000 and further investments should be in multiples of Rs 10,000;
- The interest on both would be paid out on 2 April every year;
- The interest earned on these bonds is taxable. The amount would be added to the 'other income' of the investor in the financial year in which the interest was received. So, the tax would be according to the tax slab the investor falls under. Those in the 30 per cent bracket would get a post-tax yield of 6.5 per cent. For the 10 and 20 per cent tax bracket investors, the returns would be 8.3 and 7.4 per cent, respectively.
Advantages
- The interest is attractive compared to the annual interest rate of 7.75 per cent offered by SBI on its 8-10 year fixed deposits;
- Five-year term deposits offered by banks can earn you 7-8 per cent with Section 80C benefits. Investors in the tax bracket of 20 per cent and above get a return of over 9 per cent on these deposits, which is still less than the return on SBI bonds. And even this is applicable only if they have not exhausted the Rs 1 lakh limit;
- The bonds do not attract any tax deducted at source (TDS);
- They have high liquidity as they have been listed;
- The bond issue was assigned AAA rating by CARE, indicating highest safety;
- The bonds have a call option. The Series 1 bonds would be called after five years and Series 2 bonds after 10 years. If SBI does not buy back the bonds, investors get an additional 0.50 per cent interest on the bonds.
Points to note
- The bonds do not provide any deduction under the I-T Act;
- Unlike bank deposits, they aren't covered by deposit insurance;
- They cannot be used as collateral for any loans; and
- They will attract capital gains tax when sold in the secondary market.
