When the Budget revealed that public sector firms would issue ₹40,000 crore worth tax-free bonds this year, many retail investors rejoiced. But Power Finance Corporation, the first issuer this year, has chosen to bypass retail investors to raise the money on a private placement basis from institutions and high networth investors. If all issuers of tax-free bonds choose to take this route, the menu of fixed income options available to Indian small savers would shrink further.
Small savers in India love assured returns but they are faced with hardly any options to earn a safe, tax-efficient return. With interest rates falling, banks have effected steep cuts in their deposit rates in the last six-seven months. Retail investors looking to bump up their returns from corporate deposits would find the top-rated companies absent from the market. Even the government, the most prodigious issuer of bonds, bypasses small savers. Sovereign bonds aren’t accessible to small savers.
Retail savers have to make do with very unfriendly tax policies on their debt investments too. If you are an FD investor, your interest is taxed at your slab rate which can go up to 30 per cent. If you take the MF route, dividend distributions are taxed at over 28 per cent, short-term capital gains at 10-30 per cent and long-term capital gains, at 20 per cent. Contrast this with equities, where dividends are tax-free and so are long-term capital gains if held for a year.
Retail investors seeking debt options face a devil-and-deep-sea choice: Either play safe and make do with bank deposits with ultra-low returns, or risk their principal on corporate deposits or unregulated Ponzi schemes. The least the government can do is to give them access to tax-free bonds and its own gilt auctions.
Editorial Consultant