Debt Investment Option

The best part is there is no lock-in period. The bonds will be listed on stock exchanges, or the bank may provide the exit route by purchasing these back after five years (for 10-year bonds) and 10 years (for 15-year bonds).

The issue also has an annual payout option, wherein you will earn the interest on your investment annually. Therefore, it could be a good investment option for the retired. But you need a demat account, as these bonds are not issued in physical form.

Unfortunately, these do not qualify for tax benefits. The interest earned will be treated as any other income and taxed according to your income bracket, lowering your real returns substantially in the highest tax bracket. Say, you invest Rs 1 lakh in a 10-year bond earning 9.75 per cent, you will be paid Rs 9,750 a year. In the highest tax bracket (30.9 per cent), your post-tax returns fall to 6.7 per cent.

Those in the lowest tax bracket will lose one per cent post tax and will earn higher after-tax returns of 8.74 per cent, as against five-year fixed deposits’ (tax exempt) up to 8.5 per cent.

With the State Bank of India’s high-interest providing retail bond issuance, and now others such as Indian Bank likely to follow suit, investors have yet another debt investment option to consider.

The last round of bonds issued by the country’s largest lender was giving 9.75 per cent and 9.95 per cent for 10 and 15 years, respectively, for bonds with a face value of Rs 10,000. Typically, banks raise money through bond issues to fund their long-term working capital needs. And, in times of rising inflation, high interest rates and low deposit growth, these issues also offer high returns.

If the aim for those in the highest tax bracket is to save tax, they should opt for tax-exempted instruments, such as additional contribution to the Employee Provident Fund giving 9.5 per cent or the Public Provident Fund giving 8.5 per cent. Even if the rate of interest falls in the coming years, these returns would be tax-free. Fixed maturity plans offering over nine per cent will also give better returns. These avenues will also help in capital appreciation. Retail bonds are attractive from the point of income generation.

About National Saving Scheme
Looking to build your retirement corpus, you could look at the New Pension System(NPS). Launched by the Indian government, the tier I scheme offered by NPS, is a pension scheme allows investors to choose their own investment options and pension fund managers.

Open to anyone between 18 and 55 years, a minimum of Rs 6,000 has to be invested each year, until age 60. At maturity, that is, age 60, investors would be required to invest a minimum of 40 per cent of the accumulated amount to purchase a life annuity. The rest of the money can be withdrawn in a lump sum or in a phased manner.

Investing Rs 6,000 per annum at a 12 per cent rate of interest, for the maximum term of 37 years, one would have collected a corpus of over Rs 3.65 crore at an in12 per cent . However, these returns are not guaranteed and the returns would depend on how the pension fund you choose (out of the designated seven), actaully performs.

Like any other pension scheme, NPS invests’ in government and other debt products. Its equity investments will be capped at 50 per cent.

Currently, there aren’t many pension products options to choose from. Besides public provident fund (PPF), there are just a couple of plans in the mutual fund and in the unit linked insurance pension products segment. Most insurance companies have pulled out their unit linked products after regulator, Insurance Regulatory Development Authority (IRDA) came up with a 4.5 per cent guaranteed returns mandatory. However, the traditional retirement plans offered by insurance companies, remain a good option with their built-in guarantees and option for loans against the cash value of the policy.

While PPF remains a popular investment avenue, the restriction of investing Rs 70,000 only per annum works against it. There is no upper limit for investment in NPS and the others.

However, it is with regards to fund management charges (FMC), that NPS really scores. While FMC for NPS is a mere 0.0009 per cent or 90 paise per lakh, it is 1 per cent or Rs. 1000 per lakh in case of mutual funds. Insurance companies charge up to 1.35 per cent or Rs. 1350 per lakh.

Many believe, the long lock-in period for the pension scheme works against the NPS. PPFs and other exiting pension that plans allow partial withdrawals are far more liquid.

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