At present pre-tax yield on the Bharat Bond ETF series that matures in 2030 and 2031 is 6.63%.
New Delhi: Many High Networth Individuals (HNIs) are now booking profits in tax-free bonds as the expected returns from these bonds have dropped (bond prices have gone up) to 4.3-4.5%. Instead, some rich investors are switching to Bharat Bond ETF, a bond portfolio of public sector companies with a AAA rating.
According to a report in the Economic Times, at present pre-tax yield on the Bharat Bond ETF series that matures in 2030 and 2031 is 6.63%. As it is a capital asset, capital gain tax is imposed on the profits booked on this asset and it also enjoys indexation benefits. So investors pay 20% tax on long-term capital gains after indexation. This reduces tax liability significantly and leads to higher post-tax returns.
“Investors can earn a 6% post-tax return in the Bharat Bond ETF series that matures in 2030 and 2031. It is a basket of high-quality PSUs (public sector undertakings) which gives comfort to many investors,” the financial daily quoted Vikram Dalal, managing director, Synergee Capital as saying.
Assuming an investor holds these bonds till maturity, considering inflation of 4% and indexation benefit the post-tax returns would be 6.14%. This amount is 1.5-1.6 percentage point higher compared to the current yields of tax-free bonds.
“The Bharat Bond ETF brings in diversification amongst the AAA PSUs versus a single name exposure in the case of tax-free bonds. It also offers liquidity as it is traded on the stock exchange and comes with very low fees,” the publication quoted Radhika Gupta, CEO, Edelweiss Mutual Fund as saying.
Also, there is certainty of returns as these bonds have a target maturity. So investors can use these bonds as part of their long term financial planning to dave for goals such as children’s education and marriage.
Yields on tax-free bonds have moved down in line with the lower interest rate environment. These bonds, issued by the NHAI, PFC, REC, IIFCL , IRFC and HUDCO, are AAA rated and currently give a tax-free yield of 4.25-4.5%. Many high net worth individuals bought these bonds from the secondary markets following the government’s decision to stop fresh primary issuances of tax-free bonds after 2016.
