As all of you know the NTPC Tax-free bonds are upon us tomorrow. They have generated a great deal of interest as well as debate on whether one should be investing in it. Though I had done a post on this earlier, in light of the rates announced as well as some of the points raised in Facebook and otherwise, I thought it would be topical to do a post.
First things first – the highest rate for retail investors willing to lock their money for 20 years is 7.62 %. This by itself compares quite favorably with the FD rates that you’ll be getting from the leading banks today and these are, of course, taxable in your hands as per your income tax slab. Thus if you get a rate of 7.5 % and you are in the highest tax bracket ( anyone wanting to invest 5 lacs or so in Tax free bonds must be anyway), your effective yield is only 5.25 %. You might as well put the money in a Kotak or Yes Bank Savings account, the returns will be nearly the same. So, in my opinion, if you are having bank FD as a long term instrument and you tend to roll them over once they mature, this is actually not a bad idea for you. Now, it is an entirely different matter whether you should have bank FD or not, I think those are wholly unnecessary for most people.
Some people will say that 20 years is a really long time or even 15 or 10 – the interest rates could easily go up and then you will be stuck with an instrument that yields much less than other options in the market. It is true that these bonds are relatively less liquid, though you can sell them in the secondary market. However, at this point of time the chances are we are going to go into a low cycle of rates. In 2003-2004 we had bank FD at 5.25 %, I see no reason why our rates cannot again go back to those levels or even below that. In general, rates in India have been high due to inflation figures and now that it seems to be coming under control a rate regime that goes progressively softer is very much on the cards. I think it is quite possible for the rates to drop by another 2 % or so in the next 2 years which will take it to 5 % or so. Now 15-20 years is a long time and rates may well rise again but I feel we are through the days of 9 % rates for a very long time in our country. We may not be like Japan or US in the foreseeable future, but rates may stabilize in the range of 6-7 %.
In such a scenario and under the assumption that FD is your chosen option, investing in these bonds will actually start to make sense. Let me give a personal example. In 2013 when these bonds were issued, I was looking at setting up a passive income stream. These seemed to be the perfect instrument at the rates they were offering. Today 1/3 of my expenses are taken care by the annual interests from these investments. Also at a tax free rate of 8.8 %, it is easily the best return that you can get from an instrument that is totally hassle free.
So, in summary this will be my overall recommendation for these bonds :-
- Unless you are looking for passive income, put your money in growth assets.
- If you are in the highest tax bracket and are looking to generate regular income for some reason, look at these bonds seriously. For regular FD to give these kind of returns post tax will probably take a decade, if at all it happens.
- You can potentially get higher returns in some corporate FD and long term bonds, but these come with a risk.
- For retired people who are juggling with debt funds to get post tax return of 8 % with difficulty, I feel getting a secure and completely hassle-free return of 7.62 % scores fairly high.
- Remember the whole game of indexation in LTCG will come under serious stress now as the indexation benefits will get dampened in a low inflation regime.
You need to look at all debt options and then decide whether these bonds are for you or not. Actively managed debt funds may give better returns by 1-2 % points but the taxation advantage through indexation is shrinking now. Assuming you are already maxed out in your PF and PPF and still want debt allocation, these bonds merit a look.