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Suresh Krishnamurthy

THE first offer of Safety Bonds after the ICICI-ICICI Bank merger is now open for subscription. Expectedly, the yields on the various investment options are higher than on ICICI Bank's term deposits. For term-deposit investors, that is an attractive feature.

Unexpectedly, however, the terms on offer are different from that of earlier Safety Bonds. For example, there are no monthly income options. Encash Bonds, which offered attractive liquidity terms, are also not part of the line-up.

On offer are only three options — Tax Saving Bonds, Regular Income Bonds and Children Growth Bond. The income on these bonds is eligible for deduction under Section 80-L of the Income-Tax Act.

However, investors need to bear in mind that if the Kelkar recommendations are accepted, then income, which was deductible earlier, will get taxed.

Regular Income Bonds: There are three options on offer. The terms-to-maturity is the differentiating factor in the case of these bonds, which offer annual interest payment. The terms-to-maturity of the three options are 7, 10 and 15 years respectively.

ICICI offers 6.5 per cent for term deposits, with terms-to-maturity of 2-10 years. Senior citizens get 7 per cent. As such, the coupon rate on Regular Income Bonds is higher by 1-1.5 percentage points for normal investors and 0.5-1 per cent for senior citizens.

On the other hand, the rates are around 1.25-1.40 percentage points lower than that offered by IDBI in the offer made in December. IDBI's risk, though, can be considered higher than ICICI's.

Still, in the long-term the term-to-maturity of these bonds are, per se, unattractive. This is because of the sharp fall in interest rates last year and the prospect of a rise in interest rates a few years hence. Investors would be better of taking exposures to longer-term securities through mutual funds.

Besides, the Post Office Monthly Income Scheme (POMIS) continues to provide attractive yields. These bonds can be considered more attractive than POMIS only if one feels that interest rates, five years hence, on longer-term top-rated corporate instruments would be lower than 6 per cent.

However, even if such a view were warranted, investors would get a better deal if they invest through mutual funds rather than through Regular Income Bonds. So, avoiding these bonds appears to be a better option for most classes of investors.

There is, however, a section of investors who may find the bonds appealing. Investors who are inclined to invest in term deposits and who pay taxes should consider the Safety Bonds attractive.

Even term-deposit investors should avoid the third option, which has a term-to-maturity of 15 years.

Like term deposits, tax savings under Section 80-L is available for investors in Safety Bonds too.

These bonds fare poorly vis-à-vis term deposits only in the context of tax deduction at source. Interest payment of more than Rs 2,500 per annum will entail tax deduction in the case of bonds.

In the case of bank term-deposits, tax deduction is applicable only if interest income exceeds Rs 10,000 per annum.

Even for term-deposit investors who do not pay taxes, the bonds can be considered if they are willing to undergo the rigmarole of getting back tax refunds.

Tax Saving Bonds: The coupon rate on ICICI's Tax Saving Bonds are a percentage point lower than that of similar bonds offered by Rural Electrification Corporation.

In the offer made in December, IDBI's coupon rate on tax saving bonds was identical to that of REC's. The yield on ICICI's Tax Saving Bonds are, therefore, more than a percentage point lower than REC's and IDBI's.

Given that investments can now be made in REC Bonds, those who have already invested in ICICI's Tax Saving Bonds in earlier years should choose the former . That would diversify the portfolio and also offer better returns.

But in terms of risk, ICICI Bank is better off than REC. However, given that the Government of India wholly owns REC, the higher risk need not be a deterring factor.

Children Growth Bond: These are in the nature of deep discount bonds. There are three options offering investors the opportunity to lock in to high yields for terms of 10, 15 and 21 years. The indicated yields are 7.2, 7.6 and 8 per cent respectively.

The indicate yields are, to some extent, misleading. This is because tax would have to be paid by investors each year on income that they will receive only at maturity.

This will have an impact on post-tax yields. Tax payment can be avoided and postponed to maturity only if the cumulative investments in deep discount bonds do not exceed Rs 1 lakh for an investor.

This apart, the higher term-to-maturities is a deterring factor. Investors can, therefore, avoid the Children Growth Bond as well.

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