Thursday, April 29, 2010

Bond Investment - Saving Bonds 2003

The Reserve bank of India had come out with two interesting Saving Bonds. These Bonds are known as 6.5% Savings Bonds, 2003 (Non Taxable) and 8% savings (Taxable) Bonds 2003. The erstwhile7% Savings Bonds as also the 8% Relief Bonds were discontinued long ago. Both these bonds make a very interesting investment option being available to the selected clients. Thus, it may be noted that both these bonds are not freely available for investment to all categories of tax payers. We will discuss the salient features of both the Bonds and finally at the end an equitable analysis has been made of prudent investor to decide whether to invest or not to invest in these bonds. The 6.5% Savings Bonds. 2003 (Non –taxable) are not available for sale now. We now discuss the salient features of both these investment instruments from the Reserve bank of India.

Salient Features of 6.5% Savings Bonds, 2003 (Non-Taxable)

As the name suggests, these bonds are non-taxable. Thus, the interest derived from these bonds is non-taxable. It therefore implies that these bonds would bring to the investor a net, return of 6.5% only. The interest amount would therefore be fully exempt from income tax without any upper limit. Thus, the net yield to the investor after taxes would also be 6.5% p.a. If we would like to find out the gross yield on investment in these bonds then we find that the gross pre tax yields in these bonds would be higher.

Presently, these 6.5% Saving Bonds.2003 (Non-Taxable) are not available for sale. They have been suspended by the government. However, those tax payers who are holding possession of these Bonds would continue to enjoy tax-free interest income from these Bonds.

Salient Features of 8% Savings Bonds, 2003 (Taxable)

As the name suggests, these bonds are taxable i.e the interest earned on these bonds would be taxable under income tax act 1961. These bonds are open for investment from 21-4-2003 until further notice. The bonds can be held by an individual who is a resident in India. Thus, even the NRI cannot make investment in these bonds. The individual and HUFs can make investment in these bonds. Besides, all charitable trusts and institutions which are registered as charitable institution or a university would also be eligible to make investment in these bonds. These bonds would also be issued for a minimum amount of Rs 1,000 and in multiples thereof. However, there is no upper limit of investment.

These Bonds are issued only in the form of Bonds ledger Account and may be held at the credit to the holder in an account called Bonds Ledger Account (BLA). The nomination facility for these bonds is exactly as per the nomination facility available for the 6.5% saving Bonds, 2003. These bonds which are to be issued in the Bonds Ledger Account shall not be transferable. The bonds will be repayable only on the expiration of six years from the date of issue.

The Bonds, shall not be traded on the secondary market and shall not be eligible as collateral for loans from banks, financial institutions and non banking financial company (NBFC) etc. These bonds will bear interest at rate of 8% per annum. Interest on non-cumulative bonds will be payable at half-yearly intervals from the date of issue or interest on cumulative bonds will be compounded with half-yearly rests and will be payable on maturity along with the principal, as the subscriber may choose. In the latter case, the maturity value of the bonds shall be Rs.1, 601 (being principal and interest) for every Rs. 1,000 (nominal). Interest to the holders opting for non-cumulative bonds will be paid from date of issue above up to 31st July/31st January on 1st August and 1St February. Interest on bond in the form of “Bond Ledger Account” will be paid by cheque /warrant or through ECS by credit to bank account of the holder as per the option exercised by the investor/holder.

These bonds are taxable hence income-tax would be deducted at source while making payment of interest on the non-cumulative bonds from time to time and credited to Government Account. Tax on the interest portion of the maturity value will be deducted at sources at the time of payment of the maturity proceeds on the cumulative bonds and credited to Government Account. However, tax will not be deducted while making payment of interest/ maturity proceeds as the case may be, to institutions which have made a deduction in the application from that they have obtained exemption from tax under the relevant provisions of the I.T Act and have submitted a true copy of the certificate obtained from I.T Authorities.

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