Budget 2021 Expectations: Will FM announce launch of Aatma Nirbhar bonds?

Union Budget 2021: The funds raised may help the government meet infrastructure spending and help save some tax in the hands of individuals.

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Union Budget 2021: Investing in such bonds, if launched, will help investors link their long term goals to the money locked in the bonds.

Budget 2021 Aatma Nirbhar Bonds: The Finance Minister Nirmala Sitharaman will be presenting Budget 2021 at a time when the government revenue has been impacted and the growth rate has been sliding down. Earlier, in his address to the nation on May 12, 2020, Prime Minister Narendra Modi had talked about Aatma Nirbhar Bharat Abhiyan to take the nation towards economic growth. For long term growth what the government requires is low-cost funds and adequate resources for a steady and robust growth process for the years ahead. In this backdrop, the expectation is high that the government may launch AtmaNirbhar bonds in the Budget 2021 to be announced on February 1, 2020.

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“Yes, the government needs to think out of the box to boost the economy. It has huge expenses lined up for the Covid vaccine roll-out as also additional spending on infrastructure, rural economy and the Aatma Nirbhar Bharat Rozgar Yojana FY22 to cushion the economy. For this, the Govt largely seems to be having three options – divestment of PSUs which are already in the pipeline, raising of import duties in order to encourage domestic production and something like Aatma Nirbhar Bonds. Calling these bonds as Aatma Nirbhar Bonds seems very feasible and in context due to the basic reason for their requirement,” says Col Sanjeev Govila (Retd), a SEBI Registered Investment Advisor (RIA), and CEO, Hum Fauji Initiatives, a financial planning firm which caters exclusively to armed forces officers and their families.

The need of the hour is raising low-cost funds and a means that can resonate well with the investors. “Should the government roll out Bonds, with these objectives in mind by the name of Aatma Nirbhar bonds or otherwise, it is likely to attract the attention of our people and will help the government meet the twin objectives – funds for meeting infrastructure and priority spend and help save some tax in the hands of individuals. The government may consider allowing institutions such as LIC, IDFC to issue these bonds with the condition of using the proceeds in the government’s ‘ Aatma Nirbhar initiatives schemes,” says Tapati Ghose, Partner, Deloitte India.

Providing tax incentives to the investors to invest in such AatmaNirbhar bonds, if launched, may help the mobilization drive. “Indeed the idea of launching Aatma Nirbhar Bonds for additional Fund Raising is a good idea, but it needs to be structured in a manner so that some sizeable chunk comes in the mainstream.  The ideal way could be attaching Tax-Free incentives to the bonds.  I am sure the Super Rich category is eyeing to place the idle money in 5.50% pa Tax-Free Bonds kind of instruments. Until unless there are tax incentives, it would not be appropriate to brand such Fundraising as Aatma Nirbhar Bonds,” says Rajesh Bansal, Managing Director, Midas FinServe Pvt. Ltd, a financial services

Previous Bond Issues

It may not be the first time when a government has resorted to launching such bonds. Even in the past, there has been at least one such big launch that saw huge interest in the investor community. “In the year 2010, the Government of India had permitted IFCI, IDFC, LIC and Infrastructure Finance Companies to issue Long Term Infrastructure Bonds to provide a boost to infrastructure. The government allowed an additional deduction of Rs 20,000 under section 80CCF for investment in these bonds. The deduction was over and above the aggregate limit of deduction under section 80C, 80CCC and 80CCD. However, the deductions on these bonds were discontinued in the year 2012-13. The government may allow a deduction for the investment made in Aatma Nirbhar bonds which should be in addition to the existing threshold of chapter VIA deductions. The government may in fact consider moving the bonds to ‘Exempt – Exempt – Exempt’ regime where both regular returns and at time of redemption would be exempt from tax,” says Ghose.

It will be interesting to see how the interest rate will be set and other features of such bonds, if launched. “Given the low-interest rates currently and a general perception that we are currently at the bottom of the interest rate cycle, many people, especially senior citizens, are looking for better products to get decent rates of interest. Aatma Nirbhar Bonds with a good rate of interest and an Exempt-Exempt-Exempt (EEE) structure, or at least an EET structure, can make it attractive for people to subscribe. While the tenure could be long, there could be opportunity windows available for redemption, they could be listed for trade and feasibility of non-cumulative interest option would make it a better offering,” says Col Govila (Retd)

Investing in such bonds, if launched, will help investors link their long term goals to the money locked in the bonds. Such bonds typically are for the long term and conservative investors may park some portion in them as they would carry high safety. “In our opinion, there is an appetite for such bonds in the market between the tenure of 10 years or 15 years. In order to attract investing individuals, investment opportunity should be better than RBI Floating Interest Rate Bonds. Such bonds are generating Taxable returns of 7.15 per cent per annum (2021) effectively post-tax yield comes to 4.92 per cent per annum (considering Tax Rate of 31.2 per cent) and 4.09 per cent per annum (Considering Tax Rate of 42.74 per cent-highest Tax Slab for income above Rs. 5 crore). Thus 5 per cent per annum or 5.50 per cent per annum Tax-Free coupon will be acceptable by the investing people,” says Bansal.

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