Investors flocking to tax-free, government bonds

Investors in the zero to 20 per cent tax bracket can buy the Government of India (GOI) bonds that offer of 7.75 per cent. Those in the 30 per cent tax bracket and above can look at the tax- free bonds. Both these products score over bank fixed deposits where interest rates are down to 6-7 per cent after a series of cuts in the last one year.

“There is safety and no credit risk in both GOI bonds,” said Vikram Dalal, managing director, Synergee Capital. “In addition, investors earn a good 100-125 basis points higher than bank deposits,” said Dalal.

In the GOI bond, an investor has the option to select either semi-annual interest payment or cumulative on maturity. Investors can opt for either the cumulative options or can receive interest semi-annually. The interest income is taxable and will be done so as per the income tax slab of the investor.

But an investor will not be able to exit these bonds before maturity. The facility will be available to eligible investors after a lock-in of 4, 5, and 6 years in the age bracket of 80 years and above, between 70 and 80 years, and 60 to 70 years, respectively, and these bonds can’t be treated as collaterals for loans from banks or NBFCs either.

For investors in the highest tax bracket, tax-free bonds work better. For example, the NHAI tax-free bonds, paying an interest of 7.69 per cent and maturing in March 2031, trade at Rs 1154, giving a yield of 5.86 per cent.Tax-free bonds of Nabard, which pay an interest of 7.64 per cent and mature in March 2031, trade at Rs 1189, giving an yield of 5.87 per cent. As compared to this on a fixed deposit that pays 6.4 per cent, the post-tax return for a person in the 30 per cent tax bracket will be just 4.42 per cent.

“These are government companies and AAA rated. There is no put, call options on these bonds, making them a risk-free bet for those in high tax brackets,” said Rupesh Bhansali, head (distribution), GEPL Capital.