‘Mr Super Bond’. Now at a bank near you-(source:- LiveMint-Link given below)
The returns on these bonds are better than FDs, but fall short of expectations for other investor
The Inflation Indexed National Savings Securities-Cumulative is now available for subscription. The issue will remain open till 31 December. These securities are an attempt to introduce instruments that will protect savings against inflation. Here is a quick take on how this bond looks.
What it offers
This bond is like any other government security bond. The only difference is in the way interest is calculated. The Reserve Bank of India stated in a notification, “Interest rate on these securities would be linked to final combined CPI (Consumer Price Index). Interest rate would comprise two parts—fixed rate (1.5% per annum) and inflation rate based on CPI and the same will be compounded in the principal on half-yearly basis and paid at the time of maturity. The final combined CPI will be used with a lag of three months, i.e., final combined CPI for September 2013 will be used as reference CPI for all days of December 2013.”
For example, if inflation rate during a six-month period is 5%, then the interest rate for those six months would be 5.75% (i.e. fixed rate of 0.75% for the half-year period and inflation rate of 5%). Interest rate will be accrued and compounded in the principal on half-yearly basis and paid along with principal at the time of redemption.
You can invest a minimum of Rs.5,000 and a maximum amount of Rs.5 lakh in a financial year. You can also invest on behalf of a minor.
The tenor of the bond is 10 years. Though, premature redemption is allowed, it comes with penalty—you have to pay half of the last payable coupon as penalty.
For example, if last payable coupon is Rs.1,000, then Rs.500 would be charged as penalty. However, there is a mandatory lock-in period. For senior citizens above 65 years, premature redemption is allowed after one year. For others, it is allowed after three years.
Tax treatment
The central bank’s press release clarifies that tax treatment on interest and principal repayment would be according to the extant taxation provision.
The notification says that interest on the bonds will be taxable under the Income-tax Act, 1961 as applicable according to the relevant tax status of the bond holder.
This means it would be subject to the income tax slab rate applicable to the investor and hence no tax incentive for interest earned which makes the nominal return less attractive. For example, if the coupon rate for these bonds is 11.5% in a given year, then the post-tax return for that year for someone in the highest tax bracket will be 7.95%.
That essentially results in a post-tax negative real return for the individuals in the 30% tax bracket.
When you are opting for this product, besides the interest rate look at the post-tax return. Says Gautam Nayak, chartered accountant, Contractor, Nayak and Kishnadwala, “The interest on these bonds as taxable on the applicable slab rate. Hence, though the pre-tax return will be higher than inflation, the post-tax return in most cases will be lower than inflation. For instance, for individuals in the highest tax bracket, the returns will be low. If the tax structure was on capital gains with indexation benefit, the post-tax returns would be much higher.”
There are other tax related issues as well. “As a concept the product is good as it intends to protect you from spike in inflation. However, when we look at the tax treatment there are better products in the market such as the tax-free bonds especially if you are in the highest tax bracket. And, typically you pay tax on accrual basis,” says Anil Rego, chartered accountant and chief executive officer of Right Horizons, an investment advisory and wealth management firm.
If you follow the accrual method, this essentially means that though you will not receive the interest in your hand every year, but while calculating tax liability you will have to add the interest amount to your income every year.
Mint Money take
Considering that the tax department takes a part of the benefit, the real return from these bonds looks unattractive. Besides this, it is a 10-year bond and comes with a lock-in period too, and the penalty is also high.
Moreover, for retail investors and senior citizens who pay less tax, though this return may seem attractive, there is no provision for regular interest payout.
If you are in the highest tax bracket, tax-free bonds at present could turn out to be a better option. Individuals who will benefit from these bonds are retail investors who fall in the lowest tax bracket of 10%. But for the fixed deposit investor, these bonds are the next best thing to sliced bread.
A pre-tax 8% or 9% compared with a current 11.5% return is obviously superior. Long-term fixed deposit investors should go all out for this bond. Others should explore a mix of tax-free bonds and equity funds for their long-term investment needs.
HOW TO INVEST
The Reserve Bank of India (RBI) has come up with the application form and the process. If you are interested in buying, here is how it works:
Bank is the channel
RBI is using bank as a channel to invest in Inflation Indexed National Savings Securities-Cumulative. So if you want to buy these bonds, you can invest through the authorized banks and Stock Holding Corp. of India. The authorized banks are State Bank of India and its associates, all nationalized banks, HDFC Bank Ltd, ICICI Bank Ltd and Axis Bank Ltd. All you have to do is fill an application form and submit the same along with other documents and payment to the bank. The application form can be downloaded from the RBI’s website
Banks will also give out these forms or you can download it from banks’ websites. For instance, HDFC Bank has put the application form here:. Once you submit the document along with the amount, the bank will register the investor on the RBI’s Web-based platform (E-Kuber) and on validation, generate the certificate of holding. These securities will be issued in the form of bonds ledger account (BLA). The securities in the form of BLA will be issued and held with RBI and it will act as the central depository. You can approach any of the authorized banks for such investment even if you don’t have an account with that bank.
Banks will be responsible for providing services such as change of address, early redemption, nomination and lien marking. Banks will also take care of know-your-customer. You can pay in cash, demand draft, cheques and online through Internet banking. The bonds can be transferred to nominee upon death of the bond holder.
How to redeem
If you want to redeem before maturity, you should approach the bank few days before the coupon date and apply. In case of redemption on maturity, you will be advised one month before maturity regarding the ensuing maturity of the bond with instructions to provide a letter of acquaintance, confirming the National Electronic Funds Transfer account details, etc. If everything is in order, you will get the money within a maximum of five days from maturity.
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