Investment Bonds: The Top Bonds That Can Make You Good Money
Any Investment irrespective of type or issuing country should be made within the context of investment diversification. It is often worthwhile if a portion of your investment is directed at the global market. Investment in Bonds in India is not developed like that of US, but there are good options that you can choose from in the Indian Bond Market. Presently, the commercially bond market in India is small compared to the advanced bond market in the western countries; however, the government issued securities market is on the boom.
The total amount of government and corporate bond issuances as of 2017 stood at $1.5 trillion. Of the total volume of bonds issued, 70% came from government bonds. To attract foreign investors and bolster the bond market in India, the government has introduced denominated bonds in Rupee to the foreign market; and in turn, reduces the risk that could result in currency fluctuations.
WHAT IS A BOND?
Bond is a debt security, in which the approved issuer – government, financial institution or company offers payment in terms of interest to the bondholders for a time based on the terms of the agreement in the bond. It can also be defined as a formal agreement to refund a borrowed money with interest at regular interval. Bonds allow the borrower access to funds for long-term investments especially current expenditures in government bonds.
WHAT IS THE DIFFERENCE BETWEEN BONDS AND STOCKS?
Bonds and stocks are both securities, however, the major differences are:
- capital stockholders are the owners of the company whereas bondholders are only lenders in the company.
- Bond has a definite term for maturity after which it will be refunded while the stock has no time limit.
HOW DO BONDS WORK?
After the purchase of a Bond, the approved issuer obtains money from you with it you earn fixed interest paid at regular intervals for a fixed period. When the time has expired, the principal is repaid to you.
HOW TO INVEST IN BONDS IN INDIA
It is much easy to invest in bonds or mutual funds in India. These few steps must be taken by you:
- Contact a representative
- Get the application form online or offline
- Fill the form with the requested information like name, email address, home address, mobile number, PAN etc.
- Submit copies of the requested documents along with a bank draft or cheque.
- Submit the signed documents along with the forms, bank draft or cheque.
- Get your folio number from the authorized issuer.
THE 7.75% GOVERNMENT OF INDIA SAVINGS BOND
The 7.75% GOI savings bond is a recent scheme to replace the 8% savings bond. It took effect from January 10, 2018, with a maturity time of seven years to face out the popular 8% bond. This bond provides a high rate of return compared to fixed deposit even though the interest earned is taxable; it is exempted from wealth tax in accordance with the 1957 Wealth Tax Act.
The GOI savings bond can be issued for a minimum amount of Rs 1000 and has no maximum limit for investment. Individuals and Hindu Undivided Families can invest in it. However, Non-Resident Individuals (NRIs) are not allowed for to invest in this bond.
Investors are at the liberty of making a choice between the cumulative and non–cumulative mode in the payment of interests. The cumulative mode implies that interests are paid on maturity of the bonds while in non–cumulative mode, interests are paid after every six months.
The interest income earned from the 7.75% GOI Savings Bonds is added to the investor’s income and taxed according to the tax regulations. It is good that you know that this bond is not transferable.
ELIGIBILITY FOR INVESTMENT IN GOI SAVINGS BOND
The bond may be held by an individual who is in an individual capacity, joint basis, survivor basis, an individual on behalf of a minor and a Hindu Undivided Family.
Subscription of the taxable bond
Subscription to the GOI taxable savings bond is in the form of cash/cheques of drafts and should be written in favor of the receiving office as specified in the application form.
A form of the 7.75% GOI Savings Bond
The bond is issued and held at the credit of the holder’s bond ledger account (BLA). This will be followed by a new bond ledger series opened with the prefix TB. Every investment in the Savings Bond by an existing investor is viewed as a recent investment under the new BLA.
The issued bonds will be in the form of BLAs and held with the designated branches of the financial institutions as regulated by the Reserve Bank of India.
The certificate of Holding in the form of is issued in the form TBX of TBY for both cumulative and non-cumulative investment options. It is possible to get a certificate of holding for cash applications on the same day.
Applications for the 7.75% GOI Savings Bond
Applications for the bond can be made as required in the form stating your name, home address, PAN, email address and much more. This should be accompanied by the exact payment in the form of cash/cheque of the bank draft.
Any applicant who has received exemptions from tax as prescribed in the Income Tax Act of 1961 is required to make a declaration to that effect.
Receiving Officers of the 7.75% GOI Savings Bond
The applications for the Bond are received at authorized branches of State bank of India, Nationalized Banks, Associate Banks, SHCIL and four private sector banks in the form of Bond Ledger Account as may be contained in the application form.
Nomination in the 7.75% GOI Savings Bond
A sole holder being an individual can nominate in the form one or more persons who shall be a beneficiary of the bond in the event of his or her death.
Transferability in the 7.75% GOI Savings Bond
The Government of India 7.75% Savings or Taxable Bond in the form of Bond Ledger Account is not transferable.
Advances / Tradability / Repayment of the Bond
The bond is not tradable in the secondary market and cannot be used as collateral for loans from financial institutions, banks, non-banking companies etc. The bond shall be repaid at the end of the seven years maturity period after which no interest shall accrue.
Tax-free bonds are securities issued by government, company or financial institutions to eligible investors with payment of interest on a regular basis over a fixed period without the placement of tax on the income received.
Who provides tax free bonds?
Tax-free bonds are provided by government-backed entities which include IRFC, NHAI, PFC, HUDCO, REC, NTPC and IREDA.
How does Tax-Free Bonds Work?
Tax-free bonds work on a tenure basis of 10, 15 or 20 years depending on your choice. In terms of liquidity, you can sell your bonds any time even before it matures.
In addition to this, it is very safe as you can be sure to receive your interest regularly. The ability to hold this bond in a Demat Account is an added advantage and you will be exempted from paying taxes on the interest you earn.
Who can invest in tax-free bond?
- Retail individual Investors including Non-Resident Indians and members of Hindu Undivided Family.
- Highly rich individuals who can invest huge amounts.
- Qualified Institutional buyers as stipulated in the 2000 guidelines provided by the Securities and Exchange Board of India.
- Trusts, Corporate, Co-operative Banks and regional rural banks
How does one Invest in Tax-Free Bonds?
- Investment can be made in the physical form or in Demat mode.
- During the public issuance of the bond, the application can be made either offline or online.
- If the public issue over, you can still invest but it will be through your trading account as is in shares.
BENEFITS OF TAX-FREE BONDS
Below are the outlined benefits of this bond
- Suitable fo Large Investment: tax-free bonds are most popular among high net worth investors because of the large investment option which allows them to deposit the huge sum in one place. In addition to this, it safe because they emanate from government institutions with high investment ratings.
- Knowledge of the Tax Situation: the interest realized from this investment is exempted from all taxes as included in the Income Tax Act of 1961. Note that the amount invested in the bond will not be exempted from tax but only the accruing interest will be tax-free. Therefore, it has an advantage over fixed deposits and other bonds.
- Ratings from other agencies: tax-free bonds have been accorded with positive ratings for their performance in the market by credible independent agencies.
- Low risk: the risk of losing investment is very minimal as tax-free bonds are issued and regulated by government authorized agencies and institutions.
Disadvantages of Tax-Free Bonds
- Not suitable for wealth creation: most of the investments we make are directed towards wealth creation. Tax-free bonds are not usually recommended for wealth creation because of the daily expenses we must make such as bills, children school fees, and marriage obligations. Although you will be exempted from tax, it is suitable if you have funds you may not wish to use for some time.
- Capital gains are taxed: if there is a capital gain especially on transferring on exchanges, it will be taxed. On a holding period that is less than a year, gains made on the sale of tax-free bonds on exchanges are taxed as determined by the tax rate of the investor. For a bond that has been held for more than a year, the tax rate on the gains is 10.3%.
- Not for short-term Investors: one must be careful before investing in tax-free bonds since it has a long-term tenure. Intermittent goals should be considered and investments should be made only if those funds will not be used for a long while. With a low liquidity, exit routes are always listed on the stock exchange for the investors.
- The frequency of payment is annual: interests from tax-free bonds are mostly disbursed on a yearly basis which may not appeal to the interest of most investors with the huge financial burden.
Investors who may find it uneasy to invest in Mutual Funds can opt for bonds. Investment in Bonds can be one of the best investment options since many bonds are available with huge returns on investment. To stabilize the economy and monitor income being generated, the government has put policies in place to ensure that investments above a certain limit is taxed. Although tax exemptions are placed for certain investments, many Indians are yet to fully embrace the opportunities in Bonds.