7th Pay Commission News Center



Railway bonds will earn you a tax-free 6.5-7.25%

NEW DELHI: The finance ministry on Monday approved issue of bonds by railways worth Rs 5,000 crore for the financial year ending March 31, 2010.
The bonds will be issued by Indian Railway Finance Corporation (IRFC), which will be tax-free, secured, redeemable and non-convertible, carrying an interest rate in the range of 6.5% to 7.25% per annum. The bonds will be available in the form of public issue. In another order, the government approved notification of 10 years zero-coupon Bhavishya Nirman Bonds of National Bank of Agriculture and Rural Development (NABARD), again to be issued in this financial year. The number of bonds approved for issue are 95,20,000 with maturity value of Rs 20,000, each having life period of 10 years. Income on such bonds will be taxed only on maturity as capital gain. IRFC bonds will create a good opportunity for investors in the high tax band. First of all, these are government-guaranteed bonds so there is no chance of default. In fact, in certain term, it is safer than bank deposits. Besides this, the rates of return offered by the bonds are very attractive. According to a simple calculation, a 6.5% tax free return will be equivalent to 9.28% pre-tax return, which is a very handsome rate. The highest return offered by five-year fixed deposits of bank is around 8%. If one has to pay tax at the rate of 30% of the income, the net interest rate — in case the bane is offeringa rate of 8% — would be only 5.6%. But the other rate at 7.25% offered by the IRFC bond will be even more attractive. The 7.25% tax free return will be equivalent to 10.28% pre tax return. Presently, this is better than investing in debt mutual fund. The average return offered by debt mutual fund in 5 year is 7.75%. The return from the government securities in five year is even less at around 6.4%.

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