BHAVISHYA NIRMAN BONDS-ZERO COUPON BONDS FROM NABARD
Zero Coupon Bonds, named BHAVISHYA NIRMAN BONDS are open for subscription currently and on tap, is being issued by NABARD (owned by RBI and GOVT of INDIA).Zero coupon bonds also known as deep discount bonds are bonds that offer no interest, however,these are issued at a discount to the face value. The difference between the issue price and the face value is essentially the return that the invester gets.
The current issue price of each bond is Rs 8250 and the face value is Rs 20000. The term of the bond is 10 years.As for as the invester is concerned, what this means is that for an investment of Rs 8250, he or she will recieve Rs 20000 after 10 years. In other words, the face value in this case is maturity value.The usage of the term 'face value'in place of what is normally understood as maturity value is on account of unique structure of zero coupon bonds. In the present case the issue price is Rs 8250 whereas face value isRs 20000. the discount of Rs 11750 is the return to the invester.
The maturity value would not be subject to any tax at source(TDS).The difference between the issue price and the face value will be taxed as Long Term Capital Gains ie the invester has the option of paying capital gains tax @ 10% on the difference between face value and the issue price OR @ 20% on the difference of face value and idexed issue price. In other words Tax may be 10% of(20000-8250=11750) ie Rs1175 only.The net amount left in the hand of invester will be Rs18825. Post tax return on deposit of Rs 8250 is Rs10575. This works out to simple yeild @14.24%and compound
yield of 9.26% or post tax simple yield of 12.82%.
In case of higher inflation, if indexed cost of issue price after 10 years is higher the yield will be higer than above illustration.
Currently banks offer an interest of about 9% and Kisan Vikash Patra 8.41% and interest is fully taxable at the marginal rate of tax of the invester, hence post tax return may workout to be 6 to 7% only
The NABARD BONDS offer a safe, secure and reasonably attractive avenue for the fixed income investment needs of an investor..Since there is no call back option, there is no possibility of reduction of interest rate for the period of 10 years in case of fall in interest rate in the economy.
To subscribe to the bond one has to download the application form from NABARD website (www.nabard.org).Minimum application
will be for 5 bonds ie 5*8250=41250 has to be deposited,and maturity value will be Rs1,00,000. Axis bank branches ( Old UTI Bank) are authorised collection agent of these bonds
Bhavishya nirman bond with issue price of 8250 has been closed on 31-12-2007 and new issue price of 8500 is now open for subscription from this month. All calculations of return will have to be reworked accordingly. It is understood that latest issue price is 8750 from January 2009.