Looking for an investment option that offers the safety and liquidity of fixed deposits but attractive rates of interest? Want an investment option that offers you a constant rate of interest? If that is what you are looking for, then answer to your prayers is Bhavishya Nirman Bonds.
Welcome to BNBs: BNBs are bonds issued by NABARD. They are basically zero coupon bonds, meaning you don't get any interest on them. Why BNBs? BNBs offer you far higher safety than any bank FD. Besides unlike FD, whose rate of interest varies as per the market situation, BNBs have managed to offer lucrative returns. This despite the low interest rates prevailing in the market.
Working of BNB: A BNB is actually a zero coupon bond, with a holding period of 10 years. As it is zero coupon, you don't earn any interest on it. However the bonds are sold at a discount to the face value. So the difference between the selling price and face value is the return you get.
E.g. if the bond's selling price is Rs 8,500 and the face value is Rs 20,000, it means, by making a nominal investment of Rs 8,500, you get a sum of Rs 20,000 at the end of 10 years. So the face value here is the maturity value of the bond.
Here your return is Rs 11,500 (Rs 20,000 - Rs 8,500). As the period of 10 years acts like a lock-in period, these bonds are listed on BSE in order to make them liquid.
Purchasing BNBs: BNBs can be purchased directly from NABARD or through the financial agencies that act as intermediaries for NABARD.
Holding BNBs: You can hold BNBs either in physical or in dematerialized form. In physical form, they are treated as negotiable instruments that can be transferred by endorsement and delivered by the holder. So in order to safeguard your bonds, it is always advisable to hold them in dematerialized form. Besides to sell the bonds, you must always hold the bonds in demat form.
Tax treatment: The disparity between the selling price and face value would attract capital gains tax. You have the choice of paying capital gains tax at 10 per cent on the disparity between the face value and the selling price or at 20 per cent on the disparity between the face value and the indexed issue price. TDS is not applicable here.
Rate of return: The rate of return on BNB is 8.93 per cent and is taxable. Post-tax yield is 8.29 per cent. It is a good investment option for those falling in higher tax brackets. But for those in lower tax brackets, bank FD is a better bet.
Warning: In the NABARD advertisements, you are given a simple interest rate of 12.18 per cent pa on these bonds. But this is highly misleading, as the effective yield is always compounded. It is 8.29 per cent, making it very attractive to long-term investors.
Bhavishya Nirman Bonds are zero coupon bonds with a period of 10 years. They are traded on BSE and are sold at the price that is lesser than the face value. They don't earn any interest, but as they are sold at discount to the maturity value, the difference between the two prices is your return. This return is taxable, and so is advisable for investors in higher tax bracket.