<div><em>Interest rates of other issuers could be lower than what NTPC is offering now as rates are linked to the G-Sec yield. Better not to wait especially if you have lump sum to invest for long term and are in the highest income slab, writes <strong>Sunil Dhawan </strong></em></div><div> </div><div>The Bond is back. Tax-free bonds, once a popular investment destination for wealth individuals are once again back in circulation. In times when interest rate are on the decline, these tax-free bonds appears to be a better alternative.</div><div> </div><div>In July this year government had notified seven PSU firms to launch tax-free bonds to raise funds to the tune of about Rs 40, 000 crore in this fiscal year to be used largely for infrastructure purpose. NTPC Limited is the first one to hit the block, with its issue open between 23rd September and 30th September with the mandate to collect Rs 700 crore through a public issue.</div><div> </div><div>The bonds are secured in nature are carrying AAA ratings from all the three major credit rating agencies such as ICRA, CRISIL and CARE indicating highest degree of safety regarding timely servicing of financial obligations.</div><div> </div><div><strong><img alt="" src="http://bw-image.s3.amazonaws.com/tax--graph-2.jpg" style="width: 576px; height: 145px; margin: 1px;"><br><br>Whom it suits:</strong> For those in higher tax slab, investing in tax free bonds makes more sense compared to those in lower brackets. Interest rate is on its way down and most banks currently offers interest rates on 10 year deposits of around 7.25 per cent, while the interest on bank deposit is taxable. For those paying 30.9 per cent tax, it’s like investing in a deposit of nearly 10.50 percent, which in all likelihood will not be offered by banks in near future. Tax free bonds suit those in high tax slab and have a big lump sum to invest. Rather than putting it across several banks, tax free bonds are safe avenue to park their savings. </div><div> </div><div><strong>Why high tax rate investors should prefer tax-free bonds</strong></div><div>Interest income on taxable products are fully taxable. For example interest on bank deposits is taxable at the investor’s tax rate. Banks are currently providing interest around 7.5 percent. For someone in 30.9 percent bracket, after-tax return is 5.18 per cent. Therefore, pre-tax yield is a more effective way to base one’s decision whether to invest in fixed income investment. </div><div> </div><div><strong><img alt="" src="http://bw-image.s3.amazonaws.com/tax--graph-3.jpg" style="width: 576px; height: 152px; margin: 1px;"><br><br>Tax Status</strong></div><div>The interest earned on investments in tax-free bonds are not subject to any taxation. The interest is not a part of the total income. Therefore, there is no applicability of TDS on interest income. TDS applicability will still be there on the application money. </div><div> </div><div>However, such bonds are also listed on stock exchanges, hence if there are any capital gains on transferring them on exchanges, the capital gains will be taxed. If the holding period is less than 12 months, capital gains on sale of tax-free bonds on stock exchanges are taxed as per the tax rate of the investor. If bonds are held for more than 12 months, the gains are taxed at 10.3 per cent. <br><br><img alt="" src="http://bw-image.s3.amazonaws.com/tax--graph-2 (1).jpg" style="width: 528px; height: 225px; margin: 1px;"></div><div> </div><div><strong>End Note: </strong>Interest rates of other issuers could come down as the rate is linked to the G-Sec yield. RBI may lower interest rate on 29th September pushing the yield further lower. When policy rates are cut, bond prices move up thus lowering yields. It will not be a better alternative to wait for other issuers to launch their bonds. Make use of NTPC bonds to reap benefit in falling interest rate regime.</div><div> </div><div> </div>