Why this is a right time to buy tax-free bonds


The Indian infrastructure sector, generally energy and roads, have vast investment plans. They will be lifting a poignant volume of income during this financial year by taxable bonds. This is since a supervision is not permitting any new tax-free bond issues in this financial year.

High net value investors ( HNIs) and others in a high taxation brackets have started realising a stress of this growth and have started purchasing tax-free holds listed on batch exchanges. The new burst in prices of these holds can be attributed generally to a shopping debauch from this high income group.

The NHAI 7.69% tax-free bonds, released in Mar 2016, are already trade during Rs 1,063, adult by some-more than 6% compared to a emanate cost of Rs 1,000. The tumble in seductiveness rate structure, due to cuts in benchmark rate by a RBI, and a government's tiny assets rate cut, is also fuelling a direct in tax-free bonds.

What should a sell investors do? Experts contend that it is improved they close in during a produce accessible right now. "Since stream produce is reasonable, it creates clarity to buy tax-free bonds, generally 10-year bonds, that have finished 3-4 years (with a residual holding duration of 6-7 years)," says Gaurav Mashruwala, Sebi-registered investment adviser. The yields on several listed taxfree holds are around 7% now and they might come down further.

The descending seductiveness rate regime means that sell investors will advantage from shopping tax-free holds now.

This is since a RBI might cut a rates serve this year if a monsoon plays out as expected. The supervision skeleton to reset a tiny assets rate on a quarterly basement now. This means that a tiny assets rate could come down serve in July. Banks changeable to a extrinsic cost lending rate ( MCLR) regime and resetting their lending rates on a monthly basement is another cause that is assisting in a faster delivery of rate cuts. If rates continue to tumble as expected, a marketplace cost of these taxfree holds will go adult serve and this generates a good trade event for short- to medium-term investors.

As for taxation, these holds have a slight advantage over debt mutual funds. While we need to reason debt supports for 3 years to validate for long-term collateral gains (LTCG) benefit, we usually have to reason tax-free holds for one year. LTCG will be taxed during 10% but indexation. Being seductiveness temperament securities, indexation advantage won't be available.

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