Should you invest in NABARD's Bhavishya Nirman Bond?

 

National Bank for Agriculture and Rural Development (NABARD), country's apex agriculture and rural development bank has announced the issue of "Bhavishya Nirman Bond" – A 10 Year Zero Coupon Bond, which would be issued by way of private placement as long term investment under section 2 (47) & 2 (48) of Income Tax Act, 1961.

 

A zero coupon bond are bonds that do not pay interest (a coupon) on the principal amount; instead at maturity the bonds are redeemed (payout) at their full face value. This means that one can buy a bond worth 10,000 at 8,000. During the tenure of the bonds no interest is paid by the issuer, but at maturity the issuer redeems the bonds at face value (here 10,000).

 

The other details as may be required by you are:

 

Bhavishya Nirman Bonds by NABARD

 

(Source: Application form of Bhavishya Nirman Bonds & Personal FN Research)

 

Note:

 

1. Successful applicants will be paid interest on their application money @ 3.50% p.a. from the date of realisation of application money into the NABARD account upto the end of the month in which the application money is received and will be sent to the investor by way of warrant along with the bond certificate/demat advice.
2. PAN card is mandatory for subscribing to these bonds. A self attested copy shall be enclosed along with the application form.

 

The yield which an investor would enjoy is as under:

 

(*Based on an assumption that the investor is in the 30% tax bracket)

(Source: Application form of Bhavishya Nirman Bonds & Personal FN Research)

 

Well, after reading the details of the bonds (as provided above), there may be still some more questions popping up, which are answered hereunder:

 

• Will I get any tax benefit if I invest in these bonds?
  
  No, these bonds do not entitle you to any tax benefit nor are these any "infrastructure bonds", which make you eligible for an additional tax deduction under section 80 CCF.
   
• What is the Tax Treatment of interest on these Bonds? Are these Bonds Tax Free?
  
  No, the interests on these bonds are not tax free – they are chargeable to tax. The interest income will be taxed under "income from other sources", and will be brought to tax at the respective income tax rates you fall under.
  
  No tax will be deducted at source.
   
• Can a minor apply to these bonds?
  
  Yes, a minor can apply for these bonds, but only through a guardian.
   
• Can one apply in joint names?
  
  Yes, one may apply in a joint name, but not exceeding three applicants. However, the demat accounts will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account.
   
• Who will get the interest in case of joint application?
  
  In case of joint application, interest will be accounted to the first holder only.
   
• My demat account is in joint name, but I want to apply is a single name?
  
  In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.
   
• Is there a lock-in period while investing?
  
  No.
   
• In whose favour the cheque is to be made?
  
  Cheques has to be made in the favour of "National Bank for Agriculture and Rural Development" or "NABARD" So you may ask is it worth investing?

 

Fundamentals of NABARD

If we look at the fundamental of NABARD, at present they appear quite robust. The bank's consolidated had consolidated deposits and advances of 700 billion and 1205 billion, respectively, as on March 31, 2010. It has a pan-India presence, with a wide reach in rural and semi-urban areas.

The net Non-Performing Assets (NPAs) improved from 30.31 crores in 2008-09 to 18.76 crores in 2009-10, thus forming only 0.014% of the total assets. Also, the Capital Adequacy Ratio (CAR) has been quite impressive at 24.95% as against the minimum of 9% as stipulated by RBI.

According to CRISIL's estimates NABARD will continue to receive strong funding and operational support from Government of India (GoI). The institution will maintain its healthy capitalisation and competitive resource costs. The asset protection mechanism available to NABARD is likely to continue. However, the outlook could change if there is a reduction in GoI's commitment to the agricultural and rural sectors, translating into the likelihood of decline in support to NABARD.

 

OUR VIEW:

In our opinion the bond offering is very safe, but to invest in NABARD – Bhavishya Nirman Bond, one has to shell out a minimum amount of 46,250, thus making it more suitable for High Networth Individual, who are comfortable with low post-tax yield, for high safety.

Investors should note that the interest income will be subject to tax under "income from other sources" and one will not enjoy any tax benefits for investing in this bond.

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hemanttiwa@gmail.com Feb 17, 2014 Q-Can NRI buy these bonds through secondary market ? Q- What will be the proceedure an NRI wants to invest ?

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