As Rates Crash, Your Best Bets May Still Be Tax-Free Bonds, If You Can Buy Them In The Market

The government’s decision to cut postal savings scheme rates, and the fall in bank fixed deposit (FD) rates to a range of 7-7.25 per cent for various maturities makes it tougher for savers to maximise returns.

Medium-term postal savings rates for Kisan Vikas Patras are down to 7.7 per cent and for Senior Citizens’ Savings Scheme to 8.5 per cent. But if one is in the top tax bracket, these returns come down to a range of 5-6 per cent, with the Senior Citizens’ Savings Scheme faring best at around 5.9 per cent post-tax. The best scheme for non-senior citizens is the Government Savings bond, which gives 8 per cent (less post-tax).

What this suggests is that longer-term tax-free bonds may still be a better post-tax bet despite a sharp spike in their prices. But there is the possibility of lower liquidity for longer-tenure bonds; the alternative is higher liquidity but lower returns for shorter-dated ones. Those who have already tanked up on tax-free bonds are generating huge returns, not only from high coupon rates, but from capital appreciation as well.

For example, IRFC and NHAI bonds maturing in 2022 (five-and-a-half years hence) currently give yields to maturity of 5.7-5.8 per cent (the Rs 1,000 bonds are quoted at Rs 1,100 or more), which is slightly better than what is on offer on bank FDs even for senior citizens, who get 0.25-0.5 per cent more than the rest.

Higher yields of 6-6.4 per cent are available on longer-dated tax-free bonds (eg: NHAI 2027, NTPC 2028) with good liquidity, but the ones with the best yields have very low liquidity – you may not be able to buy or sell them easily.

For those in the highest tax-brackets, thus, 5-6-year tax-free bonds seem marginally better than bank FDs, but if your time horizon is longer, tax-free bonds offering more than 6 per cent yield are the best options for now. But you may not be able to buy them easily. It may be best to buy them when they are hawked through public offers. They will start hitting the markets after November.