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Tax-free bonds vs bank FDs: Amid hawkish interest rate regime and high volatility in equity markets, tax and investment experts are batting in favour of debt and liquid funds for small time horizon. In fact, in rising interest rate regime, equity return is expected to remain tepid as volatility is expected to continue on near tp short term. So, Indian households savings are expected to move towards safe havens like bank FD, gold, small saving schemes, etc. However, experts are of the opinion that higher earning individuals who have exhausted their investment limit under well knowns sections like Section 80C, tax-saving bonds and maturity plans can be a better option than bank FDs. They said that bank FDs won't yield more than 5 per cent in short term whereas tax saving bonds may yield 1.5 per cent to 2 per cent higher than bank fixed deposit rates offered for any tenor.

Speaking on tax-free bonds vs bank fixed deposits, Vikram Dalal, Managing Director at Synergee Capital Services said, "For High Net Worth Individuals, I will suggest Tax free bonds and Target maturity Plans (Bharat Bond ETF etc). Tax Free bonds will fetch 5.5 per cent to 5.55 per cent returns in Bharat Bond ETF will give 7.25%. In rising interest rate scenario Long dated Debt Mutual Funds like PSU & Banking, Income or Gilt funds will give sub optimal returns." He said that in hawkish regime, investors look for safety, reasonable return to bit inflation and liquidity. Central PSU bonds, GOI/SDL Securities and AAA rated private sector bonds are preferred investment options.

On why tax-free bond is a better option in rising interest rate regime, Jugal Mantri – Executive Director & CEO at Anand Rathi Global Finance said, "Investor opt for debt instrument based on three basic criterions — safety of capital, liquidity and consistency of return. AAA rated Public Sector bonds carry highest safety, being listed - provide anytime entry/exit opportunity and offer higher interest rates as compared to other opportunities like bank FDs. As we know, RBI is targeting long term inflation at 4 per cent (+/-2 per cent), the recent surge in bond yield provides an excellent opportunity to generate real return on debt instruments (net of inflation)."

"Long term Interest rate moves in cycles and the current hawkish expectation have already pushed interest rates up by about 150-200 bps from its lows in last two years. In turn, yields on AAA rated 10 years bonds have surged to 7.75-7.90% and become attractive," Jugal Mantri of Anand Rathi Global Finance added.

Differentiating between the post-tax return on bank FDs and public sector bonds, Jugal Mantri said, "Post-tax returns from PSU bond is definitely better than bank FDs. PSU bonds will give 5.5% post tax return (assuming 30% tax) compared to 3.8% post-tax return on SBI FD. Further, if you invest in Debt MFs your effective tax rates on long term holding will come down further and help you in achieving better net tax return. Income on certain tax free small saving schemes may offer better return but there is limit to invest in such scheme."

On right time to buy tax-free bonds, Munish Randev, Founder & CEO at Cervin Family Office and Advisors said, "Taxpayers falling in high income tax slab, usually look for buying tax-free bonds usually at the peak of interest rate cycle so that they can enjoy higher yields for a longer period, almost always held till maturity. Also, using a tax wrapper and creating a market-linked debenture is another option to reduce the effect of taxation. For retail investors in 10 per cent income tax bracket or so, they can take advantage of higher yield from PSU bonds. But they would need a Demat account for that and also the bonds need to be available in smaller lots."

On tax-free bonds that one can think of adding in one's portfolio, experts listed out the following 10 plans:

1] IIFCL Tax free bonds 2028;

2] NHAI Tax free bonds 2030;

3] NHAI Tax free bonds 2031;

4] IRFC Tax free bonds 2031;

5] HUDCO Tax free bonds 2031;

6] PFC Tax free bonds 2033;

7] NTPC Tax free bonds 2033;

8] GOI 2032;

9] Tata Capital Financial Services Ltd 2032; and

10] HDFC Ltd 2028 (Secured).

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