Tax-Free Bonds FY 15-16: Do not buy!

Seven public sector enterprises will be issuing tax-free bonds this financial year. Thankfully, the interest rates of these bond will be much lower than the last issue. Thankfully because that would serve as a natural deterrent.

If you are young and far away from retirement, invest your money productively instead of buying these bonds.  I had earlier written a more detailed post on this. Have a look if you need more convincing.

 Tax-free Bonds: Do not invest if your retirement is a long way off!

What if I invest in a tax-free bond and invest the tax-free payouts in equity?

That is like trying to rub your nose with your tongue, when your hands are free?  Anyway, if you are interested in this, check this out:

Tax-Free Bonds – Interest payout reinvestment calculator

If you are a retiree (early/normal) or are close to retirement and think buying these bonds (or the old ones from the secondary market) would be a good way to generate tax-free income, do think twice.

These bonds might make sense for those who do not have much of a corpus to play with. They could lock into a bond that offers a good rate of return and get constant income.

However, the current rates are not attractive. The post office senior citizens scheme would offer a better return after tax (for those in 10% slab) with better peace of mind than these bonds.

If you looking to earn an income from your corpus that should increase each year (preferably close to inflation), stay away from these bonds. Your first priority ought to be liquidity and not tax-free returns.

I think it is not a smart idea to lock up a lump sum in these bonds, regardless of the fact that they can be sold in the secondary market with a demat account.

You can so much better with debt mutual funds, will full flexibility and liquidity. Yes, you need to pay out tax at 20% with indexation. That is, IMO, a much better deal.

 

Install Financial Freedom App! (Google Play Store)

Install Freefincal Retirement Planner App! (Google Play Store)

book-footer

Buy our New Book!

You Can Be Rich With Goal-based Investing A book by  P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!
Practical advice + calculators for you to develop personalised investment solutions

Thank you for reading. You may also like

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete  the entire comment or remove the links before approving them.

6 thoughts on “Tax-Free Bonds FY 15-16: Do not buy!

  1. A.Sundaram

    Valid points,Pattu.What I like most about your posts is that there is no ambiguity in your suggestions-which are usually backed up with hard statistical facts and projections.Of course,in the instant case,there was no need for any number-crunching-the tax-free bonds to be issued in F.Y.2015-16 have no investment value for the ordinary investors(irrespective of their marginal tax rate) since the rates offered would be unattractive.

    Reply
  2. A.Sundaram

    Valid points,Pattu.What I like most about your posts is that there is no ambiguity in your suggestions-which are usually backed up with hard statistical facts and projections.Of course,in the instant case,there was no need for any number-crunching-the tax-free bonds to be issued in F.Y.2015-16 have no investment value for the ordinary investors(irrespective of their marginal tax rate) since the rates offered would be unattractive.

    Reply
  3. chaitanya

    Pattu, ur not considering all points relavant to these bonds. E.g., these also will have appreciation / capital returns when interest rates drop. See the last issue of these bonds, many of those are at a premium of 20%

    Reply
    1. freefincal

      That applies only when you wish to sell the bonds. Most people buy the bonds to get regular income. I dont see the benefit of buying the bonds only to trade them later. I have better things to do, like use a debt fund for instance.

      Reply
  4. chaitanya

    Pattu, ur not considering all points relavant to these bonds. E.g., these also will have appreciation / capital returns when interest rates drop. See the last issue of these bonds, many of those are at a premium of 20%

    Reply
    1. freefincal

      That applies only when you wish to sell the bonds. Most people buy the bonds to get regular income. I dont see the benefit of buying the bonds only to trade them later. I have better things to do, like use a debt fund for instance.

      Reply

Do let us know what you think about the article