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 cent then it will be taxed at that rate. Therefore a pre-tax equivalent for an investor in the highest tax bracket on a bond offering 8.66 per cent will stand at 12.37 per cent whereas that on 9.01 per cent bond will stand at 12.87 per cent. Such a return on AAA and AA+ rated instruments backed by government is a rarity.
Alternatively, a post-tax return on a 9 per cent FD will be 6.3 per cent (at the 30 per cent marginal tax rate) whereas the bond offers you up to 9.01 per cent tax free. So there is a clear gap in the income generation from the two options.
If you invest Rs 10 lakh in a 9.01 per cent bond (where you reinvest the interest income in an instrument – equity etc--that also grows at the same rate) then in a period of 10 years your capital would grow to Rs 23.69 lakh. However, if the same amount is invested in a FD offering 6.3 per cent post tax then your capital grows to only Rs 18.4 lakh. So the difference in your wealth creation amounts to Rs 5.27 lakh in a period of 10 years on an investment of Rs 10 lakh.
Better than other investment options
Experts in the investment field say that the bonds offering such high rates have thrown up an opportunity for wealth creation which rarely come up and would not be there for long.
“It should not just be looked as an investment option but as