Tax saving bonds fade from market

IDBI, ICICI Bank, REC and PFC have failed to launce tax saving bonds.

This year don't expect any tax saving bonds to hit the market. While IDBI Bank is yet to receive permission from the Reserve Bank of India (RBI), ICICI Bank has not decided on the issue.

Infrastructure institutions like the Rural Electrification Board (REC) and Power Finance Corporation (PFC) too have not announced plans to launch such bonds.

"For the first time, we are not expecting any tax saving bonds in the market," Santosh Mishra, financial advisor with Bajaj Capital, said. Last year, all the four institutions, IDBI Bank, ICICI Bank, REC and PFC had come out with tax saving bonds.

While the bonds are missing, investors are not really complaining. "These bonds, which used to be popular till last year, have lost out to equity-linked saving schemes (ELSS)," says Mishra.

Till last year, one could invest only up to Rs 10,000 in mutual funds to get tax benefit under section 88. This year, one can invest up to Rs 100,000 to avail of tax exemption under section 80C.

While the tax saving bonds issued last year offered a maximum rate of 7 per cent, the ELSS category has given 6.2 per cent return in January alone. Impressive performance of these schemes also contributed to the rise in number of investors.

The ELSS category of mutual fund schemes is also seeing massive inflows with gross inflows rising to Rs 338 crore from Rs 156 crore a month ago. Assets of tax-saving funds rose 23.8 per cent to Rs 4469 crore.

While REC has decided not to tap market with its tax saving bonds, the banks have not been able to get the RBI nod.

"After the completion of merger with IDBI Bank in April 2005, we have to seek permission every year from the RBI. We have not received permission to issue bonds this year," a senior retail banking executive at IDBI Bank said.

"We are yet to decide on the issue," the ICICI Bank spokesperson said.

Till last year, investors used to earmark Rs 30,000 for tax saving bonds and invest the remaining money in provident funds.

This year the tax saving trend is definitely tilted towards ELSS schemes, besides provident fund, which provides a tax-free rate of 8.5 per cent.