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Photo: iStock
Photo: iStock

The Savings (Taxable) Bonds 2018: are they for you?

Each bond provides a return of 7.75% per annum, with a maturity period of 7 years

On 1 January 2018, government announced the end of 8% Government of India (GoI) Savings (Taxable) Bonds, 2003 for subscription. After initial outcry from the public and opposition, the government clarified on 3 January that new bonds that will be launched, though at a lower rate of interest. On 4 January, the 7.75% Savings (Taxable) Bonds, 2018, were launched, to be issued from 10 January 2018. Here’s more about these bonds and if you should invest in it.

Any individual or Hindu Undivided Family (HUF) can invest in these, but non-resident Indians (NRIs) cannot. The face value of 1 bond is Rs100 and at least 10 bonds can be bought. There is no upper limit. Each bond provides a return of 7.75% per annum, with a maturity period of 7 years. There are two options—cumulative and non-cumulative—to choose for interest payout. In the non-cumulative option, interest will be paid on half-yearly basis. In the cumulative option, interest is paid at the end of maturity period and a Rs1,000 investment would return Rs1,703.

The lock-in of 7 years is relaxed a bit for senior citizens, For those between 60 and 70 years, it would be 6 years, for those between 70 and 80 it is 5 years and will be 4 years for those above 80. Once the lock-in is over, senior citizens can liquidate their investment if they want to.

Remember, interest earned from the bond will be taxable under the Income-tax Act, 1961, according to the tax status of the bond holder. Interest will also attract the stipulated tax deduction at source.

Reduction in interest on these bonds is in-line with the falling interest rate scenario. Since April 2016, small savings rates are calibrated on a quarterly basis to align them with relevant government securities. Interest rates of most small savings schemes have seen a decline of more than 1 percentage point since April 2016.

Compare to other small investment avenues such as fixed deposits, National Savings Certificate (NSC) or Kisan Vikas Patra (KVP), interest rates of the GoI 7.75% (taxable) Bonds are better. However, returns from these investment avenues are taxable. “This is a good investment for those who are not in the taxable bracket, or for whom the tax rate is 10%. If they are in the highest tax bracket, their post tax returns are around 5.5% per annum, which may be lower than the inflation applicable to them," said Lovaii Navlakhi, a certified financial planner and founder and chief executive officer of International Money Matters Pvt. Ltd.

So, before you decide to invest in the GoI bonds, compare it with the other avenues—apart from small savings schemes and fixed income instruments. Apart from returns that the other avenues generate, also look at the other parameters such as risk, taxation and liquidity. “In fixed-income products, such as bonds or fixed deposits, the best way to evaluate is to consider the post-tax returns over comparable time periods," said Navlakhi.

One can look forward to debt funds and hybrid mutual funds, over these low-yielding fixed income products.

However, “Debt funds are complex, and require expertise to determine which category suits clients best—there are technical terms such as duration or accrual, tenure and credit rating—which alter returns for clients. These instruments may offer the best post-tax returns for higher-taxed investors, and an adviser is best suited to unravel these mysteries," said Navlakhi.

Even retired individuals can opt for investing in debt mutual funds to maintain returns on their portfolio. However, some of the small savings schemes still fit in the portfolio of many individuals because they offer tax deductions, and the returns generated from them are tax free.

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