NFO of Bharat Bond ETF closes tomorrow: Know its benefits, taxation before investing | The Financial Express

NFO of Bharat Bond ETF closes tomorrow: Know its benefits, taxation before investing

With the NFO of the fourth tranche of the government’s flagship Bharat Bond ETF closing on December 8, 2022, know the benefits and tax rules before investing.

NFO of Bharat Bond ETF closes tomorrow: Know its benefits, taxation before investing
The new tranche of the Bharat Bond ETF will mature in April 2033.

With the New Fund Offer (NFO) of the fourth tranche of the government’s flagship Bharat Bond ETF closing on December 8, 2022, know the benefits of investing in the new exchange-traded fund (ETF) before taking an investment decision.

With a maturity period of 11 years, the new tranche of the Bharat Bond ETF will mature in April 2033.

Benefits of Bharat Bond ETF

Stability: As the underlying index of the Bharat Bond ETF consists of AAA-rated public sector undertakings, there would be considerable stability in the capital invested with predictable return.

Return: With the AAA-rated securities of public sector undertakings having an indicative yield of 7.5 per cent, maturity date of April 18, 2033 and a modified duration of 6.66 years, the tentative net of tax yield at around 6.9 per cent.

Liquidity: With the option to buy/sell on exchange any time or through AMC in specific basket size, the Bharat Bond ETF provides an excellent liquidity to its investors.

Cost: With a minimal expense ratio at 0.0005 per cent, the cost is very low, which helps in maximising the return for the ETF investors.

Taxation: Compared to traditional investments, the investments in Bharat Bond ETF are more tax efficient.

“As Bharat Bond ETF will be investing in Fixed Income securities, Debt Taxation will be applicable to investors. Thus, any consideration received on sale/ redemption of such ETFs would be subjected to capital gains tax depending upon the period of holding. The threshold period for determination of long term capital gains is 3 years,” said Dr. Suresh Surana, Founder, RSM India.

“Accordingly, if the ETFs are held for a period of more than 3 years (i.e. long term capital gains), the gains arising from the same would be subjected to tax @ 20 per cent u/s 112 of the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act’) after availing indexation benefit,” he added.

“However, if the bonds are held for a period upto 3 years, the gains arising from the same would be subject to tax as per the marginal slab rates of the investor,” Dr. Surana further said.

Commenting on the taxation aspect, Archit Gupta, Founder and CEO, Clear, said, “The Bharat Bond ETF is a financial asset which has the characteristics of a bond. Thus, the tax rules placed upon it are also similar to bond taxation.”

Gupta lists the following steps to explain the tax aspect:

  • If held for a period more than 36 months, it is treated as long term asset
  • In case of long term assets, indexation benefit is also available
  • The tax rate for long term capital gains is 20 per cent (cess and surcharge, if any shall be applicable on top of it)
  • Section 54F exemption is available on the long term gain
  • The short term gains are taxed at the slab rate of the holder(cess and surcharge, if any shall be applicable on top of it)

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First published on: 07-12-2022 at 20:41 IST