Creating wealth through tax-free bonds

Dec 09 2013, 12:59 IST
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If you have an investment amount that you will not need over the next 10 years or so, it makes good  sense to invest in tax-free bonds If you have an investment amount that you will not need over the next 10 years or so, it makes good sense to invest in tax-free bonds
SummaryIf you have an investment amount that you will not need over the next 10 years or so, it makes good sense to invest in tax-free bonds

BR Raghunandan, 62, who retired as the executive director and company secretary at Rural Electrification Corporation (REC) in April 2011, on Thursday pulled out his retirement corpus amounting to Rs 40 lakh from his Employee Provident Fund account and has invested Rs 10 lakh each in tax-free bonds of NTPC and HUDCO in his and his wife’s name for a period of 10 years.

With decent savings, fixed deposits in banks, a house in Noida, well-settled kids and no liabilities, all that the Raghunandans were looking for was a constant stream of income at a rate that can meet their monthly expenditure. Tax-free bonds offering interest of up to 9.01 per cent came just at the right time for the couple.

“I would not have earned interest on the money in my EPF account beyond three years of retirement and had thought to invest it in fixed deposits. However, tax-free bonds came at the right time offering me high tax-free interest income every year,” said Raghunandan, who will start earning annual interest on his bonds beginning December 2014.

“I plan to use the annual interest income from the bond judiciously in a manner that I could meet my monthly household expenses over the next one year, till the next interest income is due,” he said.

Raghunandan is one of the thousands of investors who have broken their fixed deposits, pulled out money from their public provident fund (PPF) and even from EPF in order to invest in the tax-free bonds that are available in the market for subscription and offering an annual interest of up to 9 per cent. The phenomenon may also throw some light on the rush to subscribe to these bonds.

“If an investors does not need the money for the next 10 years, it is a no-brainer to invest in these bonds. However these bonds offering high tax-free interest rates are more lucrative than fixed deposits and even PPF and therefore we have seen a lot of investors breaking FDs and pulling money out of their PPF accounts and investing in these bonds,” said Rajiv Deep Bajaj vice-chairman and managing director, Bajaj Capital.

While public provident fund is currently offering 8.7 per cent, the investment amount is capped at Rs 1 lakh per individual in a year and also it does not offer annual interest income.

What are these bonds?

These are bonds issued by public sector undertakings and the interest

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