Invest in tax-free bonds to get higher post-tax returns
By March 2013, 10 government-owned infrastructure companies would issue
Rs 53,500-crore worth of tax-free bonds. As interest earned from these
bonds would not be taxed, investors would earn a better post-tax return
than from bank fixed deposits.
With most long-term fixed deposit rates settling in the 8.5-8.75% range, investors looking for fixed-income instruments have an opportunity to invest in tax-free bonds that can give higher post-tax returns than bank fixed deposits (FDs).
By March 2013, 10 government-owned infrastructure companies would issue Rs 53,500-crore worth of tax-free bonds. As interest earned from these bonds would not be taxed, investors would earn a better post-tax return than from FDs.
The interest earned on bank FDs and other normal bonds are added to the income of the investor and taxed as per the income-tax slabs. Post-tax return from an FD that offers 8.5% annual interest would be 5.9% for an individual in the 30% tax bracket.
Tax-free bonds are rated long-tenure (usually 10-15 years) fixed-income securities offering annual interest at rates less than the yield of government securities of similar tenure. At present, 10-year government bonds are trading around 8.2%. Going by these rates, one can expect the interest rate to be 7.5-8%.
One can buy and sell these bonds on the stock exchanges. Though the interest earned on these bonds is tax-free, any capital gain from sale in the secondary market is taxable.
Short-term capital gains are taxed at the normal rate, while long-term capital gains are taxed at 10% without indexation and 20% with indexation. Indexation is adjusting the purchasing price with annual inflation.
The interest earned on bank FDs and other normal bonds are added to the income of the investor and taxed as per the income-tax slabs. Post-tax return from an FD that offers 8.5% annual interest would be 5.9% for an individual in the 30% tax bracket.
Tax-free bonds are rated long-tenure (usually 10-15 years) fixed-income securities offering annual interest at rates less than the yield of government securities of similar tenure. At present, 10-year government bonds are trading around 8.2%. Going by these rates, one can expect the interest rate to be 7.5-8%.
One can buy and sell these bonds on the stock exchanges. Though the interest earned on these bonds is tax-free, any capital gain from sale in the secondary market is taxable.
Short-term capital gains are taxed at the normal rate, while long-term capital gains are taxed at 10% without indexation and 20% with indexation. Indexation is adjusting the purchasing price with annual inflation.
