Until the last financial year, 8% RBI Relief Bond (now known as the 8% Savings (taxable) Bond 2003) was the most lucrative investment avenue in the fixed income category. The reason for the attractiveness of the Relief Bond was primarily three fold - it was safe, it offered tax free returns and the returns it offered were higher than otherwise available in the market.
However, as a result of the amendments made in the Finance Bill 2003 and the notification of the RBI, the attractiveness of the 8% Relief Bond has been diluted to a considerable extent. There are two main reasons for this. First, the tax exemption on interest income from such bonds has been withdrawn. Second, the tenure of the bond has been increased to six years as against five earlier. Another relatively minor change pertains to transferability of these bonds which is no longer permitted. Also, the bonds can no longer be eligible for collateral from banks, NBFCs and financial institutions.
The withdrawal of the tax exemption on interest received from Relief Bonds and the lengthening of the tenure has impacted the effective yield offered dramatically. This is apparent from the table below:
8% RBI Relief Bond
| |
Pre Budget |
Post Budget |
| Face Value |
1,000 |
1,000 |
| Interest (pa) |
8.0% |
8.0% |
| Tenure (yrs) |
5 |
6 |
| |
|
|
| Interest Recd (pa) |
80 |
80 |
| Tax on Interest Income* |
- |
24 |
| Net Interest Income (pa) |
80 |
56 |
| Effective Yield (%) |
8.0% |
5.6% |
* Tax at 30% pa
The post tax yield on these bonds has come down to 5.60% pa, which is lower than what a 5 year fixed deposit with an institution like HDFC would offer!
Effective Yield
| Tax Bracket |
New 8% Relief Bond |
6.5% GOI Bond |
| Nil |
8.00% |
6.50% |
| 10% |
7.20% |
6.50% |
| 20% |
6.40% |
6.50% |
| 30% |
5.60% |
6.50% |
The 8% Savings (Taxable) Bond 2003 does not even compare well with its peer – the 6.5% GOI Savings Bond. If you are in the 20% or 30% tax bracket, it is better to invest in the 6.5% Bond, which offers tax free interest income.
Given the fact that 8% Savings (Taxable) Bonds is no more an attractive investment option from the returns point of view, investors in general and retired people in particular need explore other lucrative investment opportunities.
One investment avenue that comes to mind is the income funds. These funds have given phenomenal returns in the last two years as can be seen from the table shown below. The reason for this rally was the continuous fall in interest rates. One can argue that this trend may not last long (and it probably will not!) but nevertheless for investors with a time frame in excess of one year, income funds probably stand out as one of the better investment options. Over a time frame of 1 – 3 years, investors can expect to earn a return of between 8% - 10% pa. And, significantly, the dividend income received will be totally tax free, thus improving overall returns!
| INCOME(LT) FUNDS |
NAV (Rs) |
1-MTH |
6-MTH |
1-YR |
3-YR |
5-YR |
INCEPTION |
| SUNDARAM BOND A |
20.1 |
2.8% |
7.6% |
14.1% |
13.7% |
14.2% |
13.9% |
| TEMPLETON INC. BUILDER G |
21.8 |
3.3% |
7.6% |
13.9% |
14.7% |
14.2% |
14.3% |
| ZURICH I HIGH INT G |
21.5 |
2.7% |
6.8% |
13.3% |
14.0% |
13.2% |
13.5% |
| IL&FS BOND G |
16.0 |
3.1% |
6.8% |
13.2% |
13.2% |
NA |
13.4% |
| TEMPLETON INC G |
22.1 |
2.9% |
6.8% |
12.6% |
13.3% |
13.7% |
13.9% |
| K BOND DEP G |
15.6 |
3.2% |
6.7% |
12.6% |
13.5% |
NA |
13.9% |
(Growth over 1-Yr is compounded)
As we have seen, the new 8% Relief Bond does not score well vis a vis other investment opportunities. Nevertheless, for those outside the purview of income tax, or those in the lowest tax bracket, the new 8% Relief Bond can still be considered as a relatively attractive investment option (from the yield point of view).
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