Yet another debt investment option

With the State Bank of India’s high-interest providing retail bond issuance, and now others such as Indian Bank likely to follow suit, investors have yet another debt investment option to consider.

The last round of bonds issued by the country’s largest lender was giving 9.75 per cent and 9.95 per cent for 10 and 15 years, respectively, for bonds with a face value of Rs 10,000. Typically, banks raise money through bond issues to fund their long-term working capital needs. And, in times of rising inflation, high interest rates and low deposit growth, these issues also offer high returns.

The best part is there is no lock-in period. The bonds will be listed on stock exchanges, or the bank may provide the exit route by purchasing these back after five years (for 10-year bonds) and 10 years (for 15-year bonds).

The issue also has an annual payout option, wherein you will earn the interest on your investment annually. Therefore, it could be a good investment option for the retired. But you need a demat account, as these bonds are not issued in physical form.

Unfortunately, these do not qualify for tax benefits. The interest earned will be treated as any other income and taxed according to your income bracket, lowering your real returns substantially in the highest tax bracket. Say, you invest Rs 1 lakh in a 10-year bond earning 9.75 per cent, you will be paid Rs 9,750 a year. In the highest tax bracket (30.9 per cent), your post-tax returns fall to 6.7 per cent.

Those in the lowest tax bracket will lose one per cent post tax and will earn higher after-tax returns of 8.74 per cent, as against five-year fixed deposits’ (tax exempt) up to 8.5 per cent.

If the aim for those in the highest tax bracket is to save tax, they should opt for tax-exempted instruments, such as additional contribution to the Employee Provident Fund giving 9.5 per cent or the Public Provident Fund giving 8.5 per cent. Even if the rate of interest falls in the coming years, these returns would be tax-free. Fixed maturity plans offering over nine per cent will also give better returns. These avenues will also help in capital appreciation. Retail bonds are attractive from the point of income generation.