Tax incentives for corporate bonds on cards

The finance ministry looks set to announce steps to incentivise investment in corporate bonds in Budget 2013-14, to deepen the market and make the segment attractive for retail and high net worth (HNW) investors.

A ministry official in the know of the deliberations with the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) said measures to broaden the sagging corporate bond market were expected in the Budget.

The official, who didn’t wish to be named, indicated making interest on corporate bonds tax-free was also being considered, besides providing additional tax breaks over and above that available to the debt instruments.

A sluggish industrial growth has impacted the corporate bond market, too. The total public debt offers till January this financial year have been at only Rs 9,869 crore, against Rs 35,611 crore in 2011-12. The manufacturing sector has been mostly missing from the market this year.

According to PRIME Database Managing Director Prithvi Haldea, unlike other countries, where small investors put their money in corporate bonds, in India, mostly institutional investors have currently been participating in this segment.

A department of economic affairs working paper had earlier suggested offering additional tax breaks on interest income from debt market instruments, over and above the current limit of Rs 5,000, to broaden investor base by encouraging participation of retail and HNW investors, besides qualified institutional investors.

Experts pointed out that the offering in the corporate bonds should be made more attractive than bank fixed deposits to attract individual investors. While taking a final call on the extent of incentivisation, the government would, however, have to take into account the likelihood of some money shifting from the banking sector to corporate bonds, they said.