Interest earned through SBI’s retail bonds will be treated as any other taxable income.
Financial planner Lovaii Navlakhi is happy to recommend State Bank of India’s (SBI’s) latest offering to investors — retail bonds with a face value of Rs 10,000. The interest rate being offered is quite attractive — 9.75 per cent and 9.95 per cent for 10-year and 15-year bonds, respectively
The country’s largest bank intends to raise Rs 1,000 crore through the issue, keeping the option to retain another Rs 1,000 crore in case of an oversubscription open.
The issue will open on February 21 and close on February 28. Retail investors can purchase bonds worth up to Rs 5 lakh.
The good news is that there is no lock-in period. The bonds are likely to be listed on stock exchanges or the bank may provide the exit route by purchasing them back after five years (for 10-year bonds) and 10 years (for 15-year bonds).
“This issue only has annual payouts, wherein you will get interest annually,” says a senior SBI official.
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However, these bonds do not qualify for tax benefits. The interest earned will be treated as any other income and taxed according to your income bracket.
For instance, if you invest Rs 1 lakh in a 10-year bond earning 9.75 per cent, you will be paid Rs 9,750 a year. Now, if you fall under the highest tax bracket of 30.9 per cent (approximately Rs 3,000), your post-tax returns will fall to 6.70 per cent. Obviously, those in lower tax brackets will earn a higher after-tax return. “For long-term goals, we would advice retail investors to buy these bonds, provided one wants to hold on to them,” says Navlakhi. However, he advises against looking for listing gains.
The product could hurt those in the highest tax bracket because of the tax angle. “They would be better off increasing voluntary contribution to the employee provident fund (EPF), as it is returning 9.50 per cent this financial year, tax free. Even if the rate of interest were to fall in the coming years, the returns would be tax-free,” says Amar Pandit of My Financial Advisor. Even the public provident fund (PPF) will earn a higher tax-free return of eight per cent.
| REAL RETURNS | ||||
| 10-year bond interest (%) | Annual Interest Income (Rs) | Tax (Rs) | Post-tax returns (Rs) | Post-tax returns (%) |
| 9.75 | 9,750 | 1,004.25 (@10.3%) | 8,745.75 | 8.74 |
| 9.75 | 9,750 | 2,008.50 (@20.6%) | 7,741.50 | 7.74 |
| 9.75 | 9,750 | 3,012.75 (@30.9%) | 6,737.25 | 6.73 |
| 15-year bond | ||||
| 9.95 | 9,950 | 1,024.85 (@10.3%) | 8,925.15 | 8.92 |
| 9.95 | 9,950 | 2,049.70 (@20.6%) | 7,900.30 | 7.90 |
| 9.95 | 9,950 | 3,074.55 (@30.9%) | 6,875.45 | 6.87 |
| *Amount Invested = Rs 1 lakh | ||||
But those in the lowest tax bracket of 10.30 per cent will get better returns compared to PPF and fixed deposits. SBI’s five-eight year and eight-ten year fixed deposits are offering 8.50 per cent each with tax benefits under Section 80C. HDFC Bank is giving 8.25 per cent on similar tenures.
“It is a good instrument as interest rates seem to be peaking. So, this investment will command a premium once the cycle starts reversing,” says Pandit. Also, if the issue listed at a premium (previous issue listed at five per cent premium), investors could make listing gains, he said.
Listing gains are capital gains and will be taxed at 10 per cent without indexation and 20 per cent with indexation if held for more than a year. If sold within a year of purchase, the gains will be added to your income and taxed according to your income tax slab.
For those looking at tax benefits, experts advice fixed maturity plans (FMPs). These are offering 9.50 per cent as on on Thursday. But, FMPs are not assured return products.