|
| NHAI tax bonds: Not worth the low returns |
| Neha Pandey / Mumbai Jun 04, 2010, 00:56 IST |
|
In April, the National Highways Authority of India (NHAI), an autonomous body under the Ministry of Road Transport, floated its 54EC bonds. NHAI and Rural Electrification Corporation are the only companies allowed to issue such bonds.
The rate of return on these bonds is a mere six per cent a year for three years — low, if you consider that Employees Provident Fund and Public Provident Fund are offering 8.5 per cent and 8 per cent, respectively. But these bonds offer tax benefits under Section 54EC. Under this, capital gains from sale of such long-term capital assets as real estate, gold or shares can be reinvested in these instruments for tax exemption. The long-term capital gains tax is 10 per cent without indexation and 20 per cent with indexation.
Nihar Ranjan Dash, chief general manager (finance) of NHAI, said: “This year, we are offering a lower rate of interest of 6 per cent (last year, 6.25 per cent). This is in line with the existing interest rate scenario and the Reserve Bank of India’s (RBI’s) outlook. In the second half of the year, interest rates are likely to fall.”
NHAI plans to raise Rs 4,000 crore from these bonds. Those selling property and not willing to reinvest in any other property can put their money in these bonds. The investment has to be made within six months from the date of transfer of the property if the person wants to claim the benefit of deduction under Section 54EC.
The maximum amount that can be invested every year is Rs 50 lakh. However, if the long-term capital gains are more than Rs 50 lakh and accrued after October 1, the investor can split his investment into two parts. For one, Rs 50 lakh can be invested before March 31 and the rest (not more than Rs 50 lakh) can be invested on April 1. Tax benefits can be availed of for amounts up to Rs 1 crore.
But financial experts aren’t happy with the rate of return. Anil Rego, CEO of Right Horizons, said: “It is an option worth considering. But, six per cent taxable return is very low.” Rego says the capital gains should be reinvested in real estate or mutual funds.
Let’s understand this with an example. If you received a capital gain of Rs 5 lakh, which you invest in the NHAI bonds, you will get a return of Rs 5,95,508 (at six per cent a year) after three years. Here’s another option. If you want to reinvest the amount in mutual funds, you have to pay a capital gains tax of 10 per cent without indexation. Post tax, if you invest the remaining Rs 4.5 lakh in an equity-diversified fund, the returns could be between 12 and 15 per cent. At the end of three years, you would have earned around Rs 6.32-6.84 lakh. And, the returns are tax-free.
According to Value Research, a mutual fund rating agency, the category average in annual returns of equity-diversified funds has been 28 per cent (as on May 31). Even the category average returns of equity-oriented balanced funds were almost 21 per cent.
Says Kartik Jhaveri, director of Transcend Consulting: “It doesn’t make sense to invest in this instrument just to save 10 per cent of the gains. Rather, invest the 90 per cent you have in higher yielding options to offset your loss due to capital gains tax.”
|
|
|
|
|
|
|
|
|
|
 Read Business news in |  |
|
|
|
|
|
|
Advertisements |
|
|
|
|
|
|
|
|
|
|
Content Guide
