Using IIFCL Tax Free Bonds for ERE

by Vinaya HS on January 1, 2013

in Finance

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So, here’s an interesting comparison that I did between using IIFCL’s Tax Free Bonds and one of my Regular Bank Fixed Deposits for my ERE strategy (I know it’s very very tax inefficient and I’ve been meaning to move away from these — this broad “let my investments become more tax efficient” theme in general being the primary goal for 2013 and hence this post on New Year’s Day).

Using IIFCL Tax Free Bonds for ERE

Note: I’d already locked-in into this fixed deposit rate very early in 2012 and hence the higher interest rate. But see the end of this post for a more realistic comparison were you to start today.

When you hit ERE, you’d typically expect to begin with by being in the 20% tax bracket (you’ll most certainly want to take a break from everything) and then ideally move into the 30% tax bracket (because ERE does not mean that you completely stop working, just that you do much much more of what you like and more money is always a welcome thing). This leads to some interesting observations –

  • In the 20% tax bracket, there’s a slight difference between the Regular Bank Deposit and the Tax Free Bond. But astute readers would have already caught that this difference is per lac invested and so the higher your sum invested the more significant would be the difference.

  • In the 30% tax bracket, there’s a huge difference between the Regular Bank Deposit and the Tax Free Bond. This is true of my situation today and it pains whenever I pay advance tax on such income (like I did last month).

But were you to start today, here’s what the situation would look like. Fixed Deposit rates have already come down a fair bit and that worsens the situation.

Using IIFCL Tax Free Bonds for ERE

Since there are a few more tax free bonds set to hit the market this quarter, it’d perhaps be a good idea to invest equal chunks across couple of these issues just so that the proverbial eggs are all not in the same basket. More on this line of thought and my “let my investments become more tax efficient” strategies in upcoming posts.

And before I completely forget, a Prosperous 2013 to you all.




Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 8 comments… read them below or add one }

Rakesh January 1, 2013 at 9:04 PM

@Vinaya,

Good Analysis. I think we should give these bonds a miss and stick to ELSS.
You can easily get returns in the range of 12-15% in the long run.

Thiagu January 2, 2013 at 10:22 PM

Clean analysis. Thanks

amol January 3, 2013 at 3:13 AM

vinay,

in my case there are NRE fixed deposit schemes giving 9% interest are available. And there is NO TAX on these FD’s.

Isn’t it a good option for NRI people ?

Vinaya HS January 4, 2013 at 7:58 PM

@amol –

Yup! 9% tax-free is awesome!

varsha January 3, 2013 at 10:43 AM

If the slab 1 limit is raised to Rs 2 lakhs from previous years 1,80,000/- in year 2012-13.
1. Do I still get a 20,000 rebate if I purchase the Tax free bonds?

Please guide asap.

My company is not accepting the 20,000 investing in bonds this year as they are taking 1,20,000 as section 80 investments (i/o 1,00,000)

2. Also if I buy the bonds and claim it later when I file returns, the IT deptt. will accept it?

regards

Varsha

Rakesh January 3, 2013 at 4:20 PM

@Varsha,

You won’t get additional rebate of 20k, that was stopped the government last year.
The above bonds are part of 80 C investments only.

Vinaya HS January 4, 2013 at 7:56 PM

@Rakesh –

Thanks for helping out here. :-)

sanyam jain January 30, 2013 at 5:21 PM

very well written…. Thnx for sharing your knowledge with us…

Regards

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