By Arul Prakash
When market is more fluctuating, investors will search for fixed income securities. They feel that at least their capital was protected from the market inconsistency. They will be happy if they gain more from that investment. Now Rural Electrification Corporation (REC) have come out with Tax Free Bonds whose Issue was opened on 30th Aug 2013 and Closes on 23rd Sep 2013. I am not going to deal with that now. I just want to clarify something which every investor has to know about Tax Free Bonds.
What it is?
When companies (Public Sector Undertakings) need Capital to expand their business or for such reasons, they have many options. One among them is by issuing Tax Free Bonds. So the funds collected through this bond will be utilized for expanding this business or for such things.
How Riskier it is?
Generally Bonds are less risky. But it is suggested that investor need to see the Ratings of the Bond given by Credit Rating Agencies. For Example, The REC bond is AAA rated by CRISIL, CARE etc., Which shows the credibility of the company issuing the bonds. AAA is the highest rating which means the company is good and bond is less risky. If the rating is below AAA you need to think twice or take help of your Financial Advisor before investing in such bonds.
Is it Really Tax Free?
This is the important question to be answered. Many of them may think the name itself suggests that it is Tax Free, then why this question. I agree that it is a Tax Free Bond as name suggests. But we should understand that there is Conditions Apply for that Tax Free Bond to be Tax Free.
What is that Condition?
Tax Free bonds will have Maturity period which will be 10 Years, 15 Years or 20 Years. Tax Free Bond is Tax Free only if you hold that bond till maturity. If you withdraw the amount before that maturity period, then it is treated as interest income and TAXED as per your Tax Slab.
How Can I Invest?
You can invest in two ways: Through Demat Account and Without Demat Account. If you have Demat Account and invest through that account, then you can redeem the amount any time. If you invested without your demat account, you cannot redeem the amount. You must wait till its maturity that is 10, 15 or 20 Years.
So as an investor you must know your needs and you can invest accordingly. If you dont need that amount for 10, 15 or 20 years, you can invest for the long term and enjoy the Tax benefits. The above stated things are COMMON for all Tax Free Bonds.
The author is Arul Prakash B, a PGDM in Finance was an Independent Financial Planner and Director of Pushpak Financial Planners (http://pushpakfinancialplanners.weebly.com) Investment Planning, Risk Management, Portfolio Management, Tax Planning are his area of interest. He has passion for Personal Financial Planning. He can be reached at pushpakfinancialplanners@gmail.com