Yield+
What are Tax Free Bonds?
- These are long term infrastructure bonds issued mostly by public sector enterprises.
- The maturity of these bonds range from 10 to 20 years.
- These bonds pay a fixed coupon rate (interest rate) on a specified date.
- The interest incomes from these bonds are exempt from Income Tax Act 1961 under Section 10 (15) (IV) (H).
What are Fixed Deposits?
- A fixed deposit (FD) is a financial instrument provided by banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date.
If you Invest Rs.10,00,000/- in below mention Security as on 01/05/2020
| ISSUE DATE | SCRIPS | F.V | COUPON | RATING | MATURITY DATE | MARKET PRICE* | YIELD TO MATURITY |
|---|---|---|---|---|---|---|---|
| 07.64% NABARD TFB 2031 | RS.100 | 07.64 | AAA | 23/03/2031 | 117.20 | 5.50% | 01/05/2020 |
The below tables shows what makes Tax free Bonds Attractive.
| PARTICULARS | TAX FREE BONDS | FIXED DEPOSIT |
|---|---|---|
| Interest Taxability | Tax Free | Taxable |
| Interest Rate * | 5.25%-5.50% | 5.00%-6.50% |
| Tenor | 10-20 Years | 1-5 years |
| Liquidity | High Liquidity/ Tradable | Low Liquidity with Reduced Interest Rate. |
| Safety | These are issued by PSU companies & rated by Credit Rating Agencies like ICRA & CARE. | FDs are insured upto INR 5 lakh by DICGC, beyond which FDs are unsecured. |
| Scope of Capital Appreciation | Yes | No |
| Interest Payments | Yearly basis | Monthly/Quaterly/Yearly/Cumulative |
| TDS | Not Applicable | Applicable |
| Mode of Holding | Demat | Physical |
| Return | Tax Free bonds offer higher Post Tax Returns compared to FDs. | Fixed deposits has moderate return and less compared to tax free bonds |
| Pre Tax Return | 20.80% Tax Slab – 6.95% 31.20% Tax Slab – 8.38% |
20.80% Tax slab – 6.50% 31.20% Tax Slab – 6.50% |
| Post Tax Return | 5.50% | 20.80% Tax Slab – 5.15% 31.20% Tax Slab – 4.47% |
Note: Fixed deposit rates calculated at 6.50% and Bond rates calculated at 5.50%*
How Tax Free Bonds Have Fared Till Now
| SCRIP DETAILS | DOP | F.V | PURCHASE RATE | BOOK VALUE ACCRUED INTEREST |
SETTLEMENT AMT YTM |
HOLDING DAYS | MTM | BOOK VALUE ACCRUED INTEREST |
INTEREST ACCRUALS | VALUATION AMOUNT | GROSS P&L NET P&L |
RETURN % | TRANS TYPE |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 07.64% NABARD TFB 2031 ISIN: INE261F07032 I/P Date: 23/03 |
23-03-2016 | 10,00,000.00 | 100 | 10,00,000.00 | 10,00,000.00 7.64 |
1492 | 116 | 11,60,000.00 6,488.77 |
3,05,809.32 | 11,66,488.77 | 4,72,298.08 1,60,000.00 |
11.55 | Primary |
| 10,00,000.00 | 10,00,000.00 | 10,00,000.00 | 11,60,000.00 6,488.77 |
3,05,809.32 | 11,66,488.77 | 4,72,298.08 1,60,000.00 |
If you had invested Rs. 10,00,000/- in 07.64% NABARD 2031 at the rate of Rs.100 in 23.03.2016, Current gain would be Rs.4,72,298.08 & 11.55%
The tax-free bonds are rated by credit rating agencies. Since tax-free bonds are issued by government-backed companies, the credit risk is low and mostly all papers enjoy ‘AAA’ rating.
Disclaimer
In the preparation of the material contained in this document, the company has used the information that is publicly available. The company however does not warrant the accuracy of any information. The information set out is for general information purpose only and does not constitute legal or tax advice. The Company including director & employees shall not be liable for any loss or profit in any way arising from the use of this material. This should not be construed as an offer to buy or sell the securities. Any copy of the concept be it in full or a part will not be considered as an ethical practice. Past performance of the Scrips/Schemes does not guarantee similar future returns.