Investors in SBI bonds last October made instant profits with the bonds listing at a premium of close to 5%. Even if it does not list at a premium due to the rising interest rate scenario, retail investors will gain from the offer
State Bank of India (SBI) bonds for retail investors (subscription of Rs10,000 to Rs5 lakh) is offering better rates of 9.75%-9.95% for 10 and 15 years respectively. The interest rates offered by SBI (deposit rates) for 5-10 years have been steady at 8.50%-8.75% for a long time.
For a long-term conservative investor, the offered bond rates are attractive. Moreover, two credit rating agencies have stamped 'AAA' on the bonds and SBI itself is a blue chip bank. The previous bond offering was an instant hit with investors, with the issue being oversubscribed around 17 times.
SBI bank deposits fetch maximum interest of 9.25% for 555 and 1,000 days. The rate reduces to 8.25%-8.75% for a period between 555 and 1,000 days. Public sector banks, private banks and even cooperative banks are offering lower rates than SBI, for a fixed deposit (maximum rate of 9.25%). An investor looking for steady income without the hassles of fluctuating interest rate scenarios over the long term can benefit from the bond offering.
Even if the interest is not compounded and given to you every year, you can reinvest the interest in other investment options to improve your returns.
However, there are no Income-Tax (I-T) benefits, but neither do bank deposit interests fetch tax benefits above a certain level. Interest from non-convertible debentures (NCBs) is taxable even if there is no TDS (Tax Deduction at Source).
There are tax-saving bonds (infrastructure bonds) available in the market for tax savings under 80CCF (under the I-T Act), but they offer lower interest rates. They are mainly utilised for investing Rs20,000-that is over the Rs1-lakh limit for savings under 80C of the I-T Act.
One should know, interest generated by infrastructure bonds is also taxable.
|
|
SBI Bonds |
SBI Bank deposits |
|
Interest rate |
9.75% for 10 years; 9.95% for 15 years for retail investors |
555 days and 1000 days— 9.25%; 8.50%-8.75% between 5 and 10 years |
|
Cumulative option |
Not available. Take the interest and invest in other investment options to improve your returns |
Available |
|
Call option |
Available. SBI can call back the 10-year bond after 5 years and the 15-year bond after 10 years without offering additional interest |
Not available |
|
Option to redeem before maturity |
Not available. You can sell these bonds in the secondary market at prevailing market rates. If interest rates go down, the price of the bond will increase and vice-versa |
The interest rate is based on the date on which you open the deposit. It is 1% less than the interest rate for the duration of the deposit. |
|
Deposit insurance |
Not available. These cannot be used as collateral for a loan |
Available. Up to Rs1 lakh |
|
Demat needed |
Yes |
No |
|
Tax benefit |
No | No |
SBI plans to raise Rs1,000 crore through this bond issue. The bonds open for subscription on 21st February and close on 28th February. SBI has already provisioned for an oversubscription of the issue, up to an additional amount of Rs1,000 crore, taking the (total possible) amount on offer to Rs2,000 crore.— Raj Pradhan