New rural bonds for tax saving purposes

Updated on Feb 11, 2008 11:56 PM IST
There is an additional choice for investors for their tax saving investment under Section 80C. Arnav Pandya tells us about the importance of new rural bonds.
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None | ByArnav Pandya

There is an additional choice for investors for their tax saving investment under Section 80C. The introduction of the new rural bonds has made the decision about the choice of instruments important for individuals. A proper appraisal of the options is essential to ensure that the decision is made after taking into consideration the prevailing factors and also the requirements of the individual.

Tax benefit

The new bonds that have been introduced are Rural bonds from NABARD where the investor gets a tax deduction based on the amount invested in the bonds. This deduction is part of the Rs 1 lakh benefit that a person can get when they invest in specified instruments under Section 80C of the Income Tax Act. The face value of the bond is Rs 1,000 and there has to be a minimum investment of 5 bonds by an investor in order to qualify for a valid application. This allows the person to get the necessary tax deduction at the time of application. There is no benefit on the income earned and this income is fully taxable.

Returns comparison

The important point for consideration is how the return shapes up for an individual. This is at 8.25 per cent but is taxable. The return for senior citizens is higher at 8.75 per cent. The right way to compare this instrument would be to look at several other options that are present. In terms of debt options the fixed deposits from banks that are present in the market will offer returns around 8-8.5 per cent while the National Savings Certificate also has a return of 8 per cent (yield slightly higher). Both these are taxable so they are on the same level. On the other hand there is the public provident fund that has tax-free returns but this is not guaranteed and at the same time is accumulated to be paid at a later date. Senior citizens might find these bonds higher on the return chart then other instruments.

Lock-in and outflow

The other factors that need to be considered by the individual also involve the mode of operation of the bonds. The first thing is that they are for a period of five years and this involves a lock in for that time period. This is comparable to the five-year lock in for the bank fixed deposits and at the same time the six-year feature for the NSC. The bonds cannot be traded and cannot be offered as a security for a loan.

The difference that will be seen is in terms of the payout where unlike the NSC and the PPF the returns will not be accumulated but will be paid out to the individual. The payment will be made annually with the interest being received on 31 July and there is also a cumulative option if the investor desires.

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