Bond refers to a security issued by a Company, Financial Institution or Government, which offers regular or fixed payment of interest in return for borrowed money for a certain period of time.
By purchasing a bond, an investor loans money for a fixed period of time at a predetermined interest rate. While the interest is paid to the bond holder at regular intervals, the principal amount is repaid at a later date, known as the maturity date. While both bonds and stocks are securities, the principle difference between the two is that bond holders are lenders, while stockholders are the part-owners/owners of the firm/organisation/company. Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity).
Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of Deposit (CDs) or Commercial Paper are considered to be money market instruments and not bonds. Bonds must be repaid at fixed intervals over a period of time.
Disclaimer: Securities investments are subject to risks. Please read the Offer Document/Prospectus, the issue terms and conditions, carefully before taking any investment decision.
Tax Free Bonds:
Tax free bonds have emerged as highly popular investment option among investors due to the taxation benefit that they offer. These bonds, generally issued by Government backed entities, are exempt from taxation on the interest income received from such instruments under the Income Tax Act, 1961. The Central Government, in exercise of its powers conferred under Section 10 (15) (iv) (h) of the Income Tax Act, 1961, has authorized to issue tax-free, secured, redeemable, non-convertible bonds. Some of the public undertakings which raises funds through issue of tax free bonds are IRFC, PFC, NHAI, HUDCO, REC, NTPC, NHPC,Indian Renewable Energy Development Agency (IREDA) etc.
· Tenure: Choice of 10 years, 15years & 20 years
· Such bonds are likely to be listed on NSE / BSE
· No lock-in period
· Bonds upon trading on NSE/BSE, liquidity is available.
· Normally seen as safe investment.
· Could be held either in Demat or Physical form
· PAN is Mandatory
· Tax-exempt bonds enjoy a better credit rating and the interest received is tax-free, thus after-tax returns work out to be higher for the tax-exempt bond.
· The biggest draw for the investor is the tax free advantage that these bonds offer. Unlike fixed deposits, NSCs and other bonds, the interest earned from these bonds is tax free. Assuming a tax-free coupon yield of 8.2%, the implied pre-tax rate will be to the tune of 11.79% for investors in the 30% tax bracket (those earning more than Rs 10 lakh a year).
· While short term capital gains from such a sale will be taxed as normal income, long-term capital gains will be taxed at 10%. The bonds must be held for at least 12 months for the profits to be treated as long-term gains. Unfortunately for investors, the long-term capital gains from these bonds are not eligible for indexation benefit which could have cut tax.
How to Invest
· Investor may apply in Demat as well as Physical Mode, with required documents as mentioned in the respective prospectus.
· Download Application Forms
Who Can Invest
· Retail Individual Investors (RIIs)
· High Net worth Individuals (HNIs)
· Qualified Institutional Buyers (QIBs)
· Tax-Free Income
· Low risk, since companies have a better credit rating
· Listing of bonds on exchanges provides liquidity
· Option of holding bonds in 'Demat Form' makes your investments easy to handle & monitor
· Ratings by agencies like CARE, FITCH, CRISIL, ICRA enables you to assess the quality of instruments
There are many other types of Bonds that include: