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Debt Types of Bonds
Types of Bonds Back
Bonds can be broadly classified into:
  1. Regular Income Bonds
  2. Tax-Saving Bonds
Regular Income Bonds
Regular-Income Bonds, as the name suggests, are meant to provide a stable source of income at regular, pre-determined intervals, examples are:
  1. Fixed Rate Bond
  2. Floating Rate Bond
  3. Public Sector Bonds
  4. Inflation Linked Bond
  5. Bonds from Public Financial Institutions
  6. Money Multiplier Bonds/Deep Discount Bond
Fixed Rate Bond
These Bonds carry fixed rate of interest which is declared at the time of issue and remains same till maturity.
Floating rate Bonds
These Bonds carry interest rate which is linked to independent reference rates, independent index, commodities etc. and the rate is fixed for next period at the beginning of the period itself.
 
Deep Discount Bonds
This bond is issued at a discount to the face value. The face value is paid at the maturity. These bonds are also know as Zero coupon bonds or "Zeros".
 
Public sector bonds
These bonds are medium and long term obligations issued by public sector companies where the Government shareholding is 51% and more. Most of PSU bonds are in form of promissory notes transferable by endorsement and delivery. No stamp duty or transfer deed is required at the time of transfer of bonds transferable by endorsement.
 
Inflation linked bonds
These are bonds for which the coupon payment in a particular period is linked to the inflation rate at that time – the base coupon rate is fixed with the inflation rate (consumer price index-CPI) being added to it to arrive at the total coupon rate. Investors are often loath to invest in longer dated securities due to uncertainty of future interest rates. The idea behind these bonds is to make them attractive to investors by removing the uncertainty of future inflation rates, thereby maintaining the real value of their invested capital.
 
Bonds of Public Financial Institutions (PFIs)
Apart from public sector undertakings, Financial Institutions are also allowed to issue bonds, that too in much higher quantum. They issue bonds in 2 ways – through public issues targeted at retail investors and trusts and also through private placements to large institutional investors. Usually, transfers of the former type of bonds are exempt from stamp duty while only part of the bonds issued privately have this facility. On an incremental basis, bonds of PFIs are second only to GOISECs in value of issuance.
 
Retail bond issues of PFI bonds have become a big rage with investors in the last three years. PFIs have also been offering bonds with different features to meet differing needs of investors eg monthly return bonds (which pay monthly coupons), cumulative interest bonds, step up coupon bonds etc
 
Tax-Saving Bonds
Tax-Saving Bonds offer tax exemption up to a specified amount of investment, examples are:
  1. RBI Tax Relief Bonds
  2. Section 54EC Capital Gains Tax Exemption Bonds
  3. ICICI Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
RBI Savings Bonds
RBI Savings Bonds are an instrument that are issued by the RBI, and currently has two options – one carrying an 8 percent rate of interest per annum, which is taxable and the other one carries a 6.5 percent (tax-free) interest per annum. The interest is compounded half-yearly and there is no maximum limit for investment in these bonds. The maturity period of the 8 percent (taxable) bond is six years and that of the 6.5 percent (tax-free) bond is five years.
 
Tax Implications: In case of the 6.5 per cent RBI Savings Bond, the interest received is completely exempt from income tax as per the provisions of the Income Tax Act, 1961. But, In case of the 8 percent RBI Savings Bond, the interest will be taxable under the Income-Tax Act, 1961 as applicable according to the relevant tax status of the bondholder. RBI Savings Bonds are exempt from Wealth Tax. However, there is no tax benefit on the amount invested in these bonds
Section 54EC Capital Gains Tax Exemption Bonds
Investments in bonds issued by the Rural Electrification Corporation (REC) and NHAI are at present eligible for capital gains tax savings. Gains made out of a capital transfer need to be invested in the above bonds within six months of sale of capital assets in order for the proceeds of such sale to be exempt from capital gains tax.
REC Capital Gain Tax Exemption Bonds
Nomenclature REC Capital Gain Tax Exemption Bonds
Face Value Rs, 10,000/-
Mode of issue Private Placement
Minimum Application One Bond of Rs.10000/-
Maximum Application 500 Bonds of Rs.10000/- as per the conditions laid in the Finance Act, 2007
Mode of subscription 100% on application
Deem date of allotment Last day of each month in which the subscription money is realized and credited to REC account.
Coupon Rate &
Payment of Interest
6.00% (payable annually on 30th June) from the date of realization of cheque/draft in account of REC. Ist interest will be payable on 30th June, 2009.
Tap Period Upto 31st March, 2009. However, the corporation would have a right to close the issue any time by giving a prior notice of 5 days in any two leading dailies.
Tenor 3 years from the deemed date of allotment.
Redemption At par, at the end of 3 years from the deemed date of allotment.
Transfer Non-Transferable
Nature of Security English mortgage creating pari-pasu charge over REC’s immovable property and charge on receivables of REC to the satisfaction of the trustee.
NHAI Capital Gain Tax Exemption Bonds
Credit Rating “ AAA/Stable” by CRISIL ,“ AAA/ind” by Fitch Ratings and "AAA" by CARE
Face Value Rs. 10000/- per Bond
Issue price Rs. 10000/- per Bond
Minimum application size Five Bonds of Rs. 10,000/- each and in multiple of one Bond thereafter.
Maximum application size Five Hundred Bonds of Rs. 10,000/- each (Rs. 50,00,000 ) subject to fulfillment of other conditions as specified in Income Tax Act.
Mode of Subscription 100% on application
Deemed Date of Allotment Last day of each month for application money cleared and credited in NHAI’s collection account
Transferability The Bonds are non-transferable, non-negotiable and cannot be Offered as a security for any loan or advance
Maturity 3 years from Deemed Date of Allotment
Interest payment Annual
Coupon rate 6.00% Per annum
Redemption Bullet, at the time of Maturity
Trustee Syndicate Bank, 6, Bhagwan Dass Road, New Delhi-01
Availability of the prospectus
and application form
Across the country with NHAI offices, leading SEBI Registered Category-I Merchant Bankers & Banks
Bankers All the Branches of IDBI Bank and Selected branches of Syndicate Bank, HDFC Bank & Punjab National Bank. For details of bank branches please refer Information Memorandum (IM).
Ceiling Rs.4000 Crore
Date of Allotment At the last day of every month
Date of Start 11.05.2009
Date of Closure 31.03.2010
Applicable Laws Income Tax Act 1961 and NHAI Act
Registrar M/s Beetal Finacial & Computer Services (P) Ltd, "Beetal House",3rd Floor, 99, Madangir,Behind Local Shopping Centre, New Delhi-110062 , ph. 011-29961281-83, Fax - 011-29961284,Email- beetal@beetalfinancial.com
TDS No TDS
Tax Implications: The main feature of the REC Bonds is that you can claim Capital Gains Tax benefits benefit under Section 54EC of the Income Tax Act, 1961. If you have realized any long-term capital gains, you can avoid paying tax on it by investing the gains in the REC bonds. Such gains have to be invested within 6 months of realizing the same, and the investment has to be locked up for a minimum period of 3-years. However, the interest that will accrue on this investment is taxable.
Tax Saving Infrastructure Bonds
Infrastructure bonds are available through issues of ICICI Bank and IDBI, brought out in the name of ICICI Safety Bonds and IDBI Flexi bonds. These provide tax-saving benefits under Section 88 of the Income Tax Act, 1961, up to an investment of Rs.1, 00,000, subject to the bonds being held for a minimum period of three years from the date of allotment. For instance, the tax-saving bond from ICICI Bank for the month of August 2003 provides four options:
ICICI Bank Tax Savings Bond August

Options

I

II

III

IV

 

Tax Benefit Available

Sec 88

Sec 88

Sec 88

Sec 88

Issue Price (Rs.)

5000/-

5000/-

5000/-

5000/-

Redemption Period

3 years

3 years 4 months

5 years

5 years 4 months

Face Value

5000/-

6025/-

5000/-

6750/-

Interest Rate (%) p.a.*

5.75

Deep Discount Bond

5.75

Deep Discount Bond

Frequency of Interest payment

Annual

N.A

Annual

N.A

YTM (%)*#$ (with tax benefits)

12.0

11.0

9.7

9.1

Minimum Application

1 Bond

1 Bond

1 Bond

1 Bond

 
Similarly, the IDBI Infrastructure (Tax Saving) Bond (IDBI Flexi bonds - 17 Issue, issued in January 2003) offers 4 options viz. Annual Interest (2 Options) and Cumulative (2 Options). The minimum investment was Rs.5000/- only i.e. one bond for all options. The investor has option to receive interest @ 7.25% p.a., payable annually for three years or 7.50% p.a., payable annually for five years under the Annual Interest Option. Under the Cumulative Option, the initial investment of Rs.5000/-, becomes Rs.6390/- after three years and six months or Rs.7450/- after five years six months.
 
Tax Implications: According to Section 88 of the Income Tax Act, 1961, subscription to the Tax Saving Bond would entitle Individuals and HUFs to a rebate from Income tax as indicated below:
 

Gross Total Income (Rs)*

Rebate

0 – 150,000

20%

150,001 – 500,000

15%

500,001 & Above

Nil

 

 

 
  1. Rebate under section 88 is available on the aggregate of the sums paid or deposited up to Rs.1,00,000/-, including subscription to Tax Saving Bonds of the Issuer Company.
  2. An individual would be entitled to an enhanced rate of rebate @ 30% if his income chargeable under the head “salaries” does not exceed Rs.1,00,000 before allowing deduction under section 16 and is not less than 90% of the gross total income subject to provisions under section 88 of the Income-tax Act.

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