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Stock Analysis, IPO, Mutual Funds, Bonds & More

Taxed, ultra HNIs turn to tax-free bonds

Find double-digit returns from such bonds appealing post proposal to raise tax surcharge.

, ET Bureau|
Updated: Jul 23, 2019, 09.04 AM IST
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Ultra HNIs are directly investing in startups
These bonds currently yield 5.5- 5.9 per cent, compared with 6.1-6.5 per cent a month ago.
MUMBAI: Super-rich Indians are rushing to buy tax-free bonds, which offer an effective double-digit return in the proposed new tax regime, at a time when uncertainty has gripped the stock market.

While there aren’t any fresh issues of tax-free bonds, those issued during 2011-2015 by the National Highway Authority of India, REC, Power Finance Corp and Hudco and other state-run firms with tenures of 10, 15 and 20 years are available for purchase on the secondary markets.

These bonds currently yield 5.5- 5.9 per cent, compared with 6.1-6.5 per cent a month ago. What makes these attractive to the ultra high-net-worth individuals is that the returns are tax free — that is an enticement for those who are taxed at as high as 42.74 per cent as per the new tax proposals. If the tax benefit is accounted for, the “return for the highest tax-bracket investor will be more than 10 per cent, making for an attractive investment opportunity”, said Vikram Dalal, MD, Synergee Capital.

Dalal said the demand for these products came in suddenly after the finance minister proposed to increase the personal tax surcharge for high-income earners, from the previous 15 per cent to 25 per cent for those earning Rs2-5 crore and 47 per cent to those with annual income of more than Rs5 crore.

On a yield of 5.5-5.9 per cent, the gains for investors in the highest tax slab of 42.74 per cent will be more than 10 per cent, as they don’t have to pay tax on the returns from these bonds. A fixed bank deposit yields 7-7.25 per cent. Another factor that led HNI investors to the relatively safer bonds is the recent slump in stock prices.
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