Creating wealth through tax-free bonds

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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

offered on the bonds attract no tax thereby making them attractive. The bonds are benchmarked to the GSec yields and since the yields had hit to levels of around 9 per cent in the recent past, the bonds being offered by the PSU’s at this time have are carrying a high coupon interest rate. The bonds offer annual interest and are also listed on the stock exchanges where they can be traded and therefore investors can make capital gains on the bonds when the yield on GSec falls as they can sell their bonds at a premium in the market.

Raghunandan, however, says that he will not be trading his bonds in the market and is looking for stable regular income rather than capital gains from it.

NTPC, HUDCO and IIFCL have announced their tax-free bonds offering a minimum of 8.66 per cent interest and a maximum of 9.01 per cent to the retail investors. NTPC’s AAA rated bond that was offering 8.66 per cent, 8.73 and 8.91 per cent to the retail investors on bond tenures of 10,15 and 20 years respectively came to a close on Thursday even though it was planned to close for subscription on December 16, as the issue witnessed a 3.3 times subscription to its Rs 1,000 crore bond issuance (that has an option to retain oversubscription amounting to Rs 750 crore).

However, HUDCO’s ‘AA+’ bond is offering up to 9.01 per cent will remain open for subscription till January 10. IIFCL’s ‘AAA’ rated bond issuance that will offer an interest of up to 8.91 per cent will open for subscription on December 9, 2013.

Retail investors however can invest only up to Rs 10 lakh in such bond issuances.

Why are they better than Bank FD’s?

A look at the interest rates being offered by the banks shows that they are not too bad. State Bank of India is offering an interest rate of 9 per cent on its term deposit of 1 year and above and the Bank of Baroda is offering a rate of 9.05 per cent on the same.

While the interest rates being offered by banks may seem comparable, the difference comes on the fact that the bonds are tax free, where as the interest income on the term deposits with banks attract tax at the marginal tax rate.

So if your income falls in the highest income tax slab of 30 per

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