LookWho’sGain­ing fro­maFallinRates? For­got­tenGOIBond

The Economic Times - - Companies -

Mum­bai: A fixed in­come prod­uct floated by the gov­ern­ment that was ig­nored by in­vestors for al­most five years is back in de­mand. Fixed in­come in­vestors are flock­ing to the Gov­ern­ment of In­dia (GOI) Sav­ings Bonds, 2003, since April 1, af­ter the re­duc­tion in in­ter­est rates on small sav­ings and post of­fice t i me- d e p o s i t s . With in­ter­est rates ex­pected to soften fur­ther, in­vestors are lock­ing their money in these bonds that of­fer 8% re­turns an­nu­ally.

“GOI bonds pay a lit­tle more than post of­fice time-de­posits and bank de­posits. They are very safe since they are is­sued by the gov­ern­ment of In­dia, and hence there are in­creased en­quiries and in­vest­ments into these bonds over the last cou­ple of weeks,” says Anil Cho­pra, group CEO at Ba­jaj Cap­i­tal.

Be­fore­ther­ate­cu­ton­s­mall­sav­ings and post of­fice time-de­posits were an­nounced, a 5-year time-de­posit from the post of­fice paid 8.5% ev­ery year. From April 1, the same de­posit fetches 7.9%. Other com­pa­ra­ble prod­uctssuchas­fixed­de­posits­from banks like SBI and HDFC Bank pay a max­i­mum of 7.5%, while Bank of Bar­oda pays 7.3% and for­eign banks, like HSBC, pay 7.25%. Given that these gov­ern­ment bonds pay 8%, which is higher than the com­pet­ing prod­ucts, smart in­vestors are lock­ing them­selves onto these bonds. The bonds have a ten­ure of six years and in­vestors can choose to take in­ter­est ei­ther on a half yearly ba­sis or on a cu­mu­la­tive ba­sis at the end of the ten­ure. In the last five years, this prod­uct was out of favour be­cause post of fice time-de­posits and banks paid higher than 8% in a higher in­ter­est rate regime. Wealth man­agers say with rates ex­pected to de­cline, in­vestors want to lock in their money for six years. In­ter­est in­come from these bonds, how­ever, are tax­able. In­vestors are li­able to pay tax de­pend­ing on his tax


slab. Tax de­ducted at source (TDS) will be ap­pli­ca­ble if in­ter­est from this in­stru­ment earned is more than ₹ 5,000 in a fi­nan­cial year. Un­like tax-free bonds, these bonds are illiq­uid and shall not be trad­able in the sec­ondary mar­ket and will not be el­i­gi­ble as col­lat­eral for loans from banks and fi­nan­cial In­sti­tu­tions.

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