Tax free bonds - 2013
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This document discusses fixed income investment options and recommends tax-free bonds. It notes that while fixed deposits offer stability, after-tax returns are often lower than inflation, meaning investors' capital erodes over time. To boost returns, it suggests either higher-yielding assets like equity and gold or reducing taxes through options like fixed maturity plans and tax-free bonds. Tax-free bonds issued by government companies offer tax-free interest rates of 7.69-11.10%, higher than most other fixed income alternatives. The document encourages contacting Taurus Capital Advisors for more details on investing in tax-free bonds.
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Tax free bonds - 2013
- 1. Why you should invest in TAX FREE BONDS Taurus Capital Advisors January, 2013
- 2. Do you invest in Fixed Deposits • If you invest in Fixed Deposits, it is primarily because of any/ or all of the following reasons • Certainty of returns – a fixed deposit has a fixed rate of return • No risk to the capital – Banks (especially PSU banks) are here to stay forever • Regular income – Interest income is received at regular intervals • Ease of operations – You can go to your bank’s branch and they open your fixed deposit Fixed Deposits are a very good investment to protect your capital and earn decent return
- 3. What are Real Returns? • I would like to explain this with an example • Mr. X, made a fixed deposit for a fixed rate of 9.0% for 3 years • Which means he would get 9% every year • This income is taxable as per the tax slab of Mr. X, assuming he is in the highest tax bracket (i.e. 30.9%) • After tax return for this fixed deposit is then – 6.22% • In other words Rs.10,000 in fixed deposit gives him Rs. 622 in hand • Inflation – an indicator of increase in cost of living • Currently inflation in India is around 8-9% (average of last 3 years) • Real Returns = Nominal Returns – Inflation • In this case Mr. X, has a negative real returns • In simple words Mr. X is earning less then his increase in cost of living, and in some years his capital would start eroding Are Fixed Deposits generating wealth?
- 4. So, how to increase Real Return? • As you can guess it yourself, there are two ways to do that • Choose an investment which has higher rate of return, and/or • Investment where tax impact is lesser • Asset classes like Equity, Gold and Property can generate higher returns, but they are riskier too. There could be a risk to the capital too. • Then how do we improve returns or reduce tax burden, and still remain in the same asset class of Fixed Income • Fixed Deposits are a type of fixed income instruments Choosing a better fixed income product can help increase returns or reduce tax burden
- 5. Fixed Income Options 1 Fixed Deposits with banks or housing finance companies like HDFC Annual or quarterly interest payment, instead of cumulative Return ★★★ Tax ★★ Liquidity ★★★★ 2 Fixed Maturity Plans (FMPs) by mutual fund houses Reduce tax burden by taking benefit of indexation Return ★★★★ Tax ★★★★★ Liquidity ★★ 3 Tax Free Bonds by PSU entities Annual interest payment, which would be Tax free Return ★★★★★ Tax ★★★★★ Liquidity ★★★★
- 6. Introduction to Tax Free Bonds • Tax free bonds are offered by government companies • Money raised is invested in infrastructure development in the country • Interest earned on such bonds is Tax Free • Current & upcoming offerings are given below Issuer Issue Start Issue End Coupon Coupon (10 Years) (15 Years) India Infrastructure Ongoing 11-Jan-13 7.69% 7.86% Finance Co. Ltd. HUDCO 9-Jan-13 22-Jan-13 7.84% 8.01% Indian Railway Finance 21-Jan-13 29-Jan-13 7.68% 7.84% Co.
- 7. Some numbers Before Tax After Tax Fixed Deposits 8.75% to 9.65% 6.00% to 6.70% FMPs 8.50% to 8.75% 8.50% to 8.75%1 (Double indexation) Tax Free Bonds 11.10%2 7.69% 1. Negligible tax impact due to double indexation, which is the effect of inflation 2. Is the pre-tax yield, assuming the individual is in the highest tax bracket
- 8. Thank you For further details & investing Please contact Taurus Capital Advisors +91-98290-07926 [email protected]