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Investors wary of the volatility of the stock markets can consider investing in the notified bonds issued by the National Bank for Agriculture and Rural Development (NABARD). These bonds were first issued in March 2016.

  1. What are NABARD Notified Bonds?
  2. About NABARD
  3. NABARD Tax-Free Bonds 2016: Key Highlights
  4. Why Should I Invest in Tax-Free Bonds?
  5. Advantages of Investing in NABARD Tax-Free Bonds
  6. Disadvantages of Investing in NABARD tax-Free Bonds
  7. Is this a good investment option for me?

1. What are NABARD notified bonds?

NABARD issued its Tax-Free Bonds for INR 5,000 crores with tenures of 10, 15 and 20 years, in March 2016. The bonds were given a rating of ‘CRISIL AAA/Stable’ by the Credit Rating Information Services Of India Limited (CRISIL), and a rating of ‘IND AAA/Stable’ by India Ratings. This means that the bonds received the highest rating in terms of safety and the institutions’ ability to service its financial obligations. The bonds carry low credit risk.

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2. About NABARD

The National Bank for Agriculture and Rural Development (NABARD), established in 1982 by a special Act of the Parliament, is a prime development institution in India. The mission of the institution is the upliftment of the rural sectors of India through the improvement of the agricultural and non-farm sectors with the help of increased credit flow in these areas.

Under the NABARD Act, the Bank is mandated to aid the flow of credit for the development and promotion of small-scale industries, agriculture, handicrafts, cottage industries, etc., along with other related economic activities in the rural regions.

3. NABARD Tax-Free Bonds (2016): Key HIghlights

a) Coupon Rate

The coupon rates offered to retail investors with less than INR 10 lakh investment is as follows:

i) The coupon rate for 15-year duration bonds: 7.64 percent
ii) The coupon rate for 10-year duration bonds: 7.29 percent

Retail investors with applications above INR 10 lakh investment were subject to 0.25 percent less interest comparatively. The coupon rate for these investors stood at 7.04 percent on 10-year bonds and 7.35 percent on 15-year bonds.

b) Face Value and the minimum investment

The face value of the bond was INR 1000 and the minimum interest requirement stood at 5 bonds, INR 5000 and in multiples of 1 bond after that.

c) Non-Resident Indians do not qualify to apply for these tax-free bonds

d) Tax and Interest

As the name suggests, there is no tax deducted on interest, therefore there is no TDS deductions. The interest is paid annually.


4. Why should I invest in tax-free bonds?

There are good reasons for investing in tax-free bonds.

a) These bonds are mostly AAA/AA rated and are secure

b) As is indicative of the name, the bonds are tax-free as per the Income Tax Act of 1961

c) There is a good scope for capital appreciation with falling interest rates

d) These give you the option of selling in the secondary market if you wish to exit as they are listed on the NSE/BSE. (Note: NABARD Tax-Free Bonds are proposed to be listed on the BSE).

If you are unsure about which investment scheme suits your goals and needs best, get in touch with a financial expert for guidance. At ClearTax, we help you meet understand and achieve your financial goals.

5. The Advantages of Investing in NABARD Tax-Free bonds

a. Being a Government of India enterprise, NABARD is a safe institution to invest in.

b. The NABARD tax-free bonds are proposed to be listed on the BSE. This will provide holders with more liquidity.

c. The interest income from this bond is tax-free and is payable annually.

d. Investors who do not have a Demat account needn’t worry as these bonds can be held in physical form as well.

e. The NABARD tax-free bonds have an ‘AAA’ rating.

6. Disadvantages of Investing in NABARD Tax Free Bonds

Investing in the NABARD tax-free bonds may not be the best bet for investors falling under a low-income tax bracket. It is not the best investment option for investors in the 10 or 20 percent income slab rate. (It is better suited to you if you are an investor with an income slab rate of 30 percent, as this will give you a reliable source of income systematically over a long-term).

In terms of returns, one can get 12 to 15 percent with risk tolerance, with investment options like equity mutual funds.

7. Is investing in the NABARD Tax-Free bonds a good investment option for you?

NABARD tax-free bonds are a good investment option if it matches your financial goals. Consider the following before opting for these tax-free bonds:

a) Evaluate your financial goals before investing and do not invest only because the interest income is not subject to taxation.

b) If you have relatively long-term financial goals, equity-related investments would be a better option for you.

c) Assess the trade-off between the high returns of mutual funds and the post-tax benefits of tax-free bonds.

Note: This analysis is based on market research and ClearTax in no way endorses this or any other institution or company.

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