Choosing Between Tax-Free Bonds and Bank Fixed Deposits
Tax-Free bonds have drawn a tremendous interest of the investors and surfaced as a popular investment alternative due to the taxation benefits they offer.
Tax-free bonds are mostly issued by Government backed Enterprises (IRFC, IIFCL, NHAI, REC, PFC, HUDCO, NHB, NTPC and NHPC were allowed to issue in 2013-14) which have AA ratings thus reduces the risk on non-payment. These bonds bear a fixed coupon rate (interest rate) with an investment horizon of 10, 15 or 20 years.
At present Bank Fixed Deposit is the most favoured investment option because of the low credit-risk as well as the rate of return it has. So what actually makes Tax-Free bonds more lucrative then Bank Fixed Deposits?
Below is the quick and brief summary of Tax-Free Bonds and Bank FD:
Conclusion: Since a Tax-Free bond gives a Tax-Free return and at a fixed interest rate, it becomes very attractive in declining interest rate scenario. Investors who fall in higher tax bracket or high-net worth individuals (HNIs) should definitely have to invest in Tax-Free bonds.
Point to Remember:
Unlike Bank FDS, Interest in Tax-Free Bonds is paid annually, so in case you don’t need money regularly and want a lump sum amount at the end of tenor, you have to lookout options to reinvest the interest income. The best option would be open a Recurring Deposit account with bank and to go for mutual funds via Systematic Investment Plan (SIP) route.