My Moneycontrol Article – Budget Impact On Fixed Income Investments

The one big day of the year, which almost all of the taxpayers and investors await, is today. It is the Budget Day. Though I would call the announcements to be of a very low significance, this year’s budget has something in it for the fixed income investors. Here is what the budget has in it for us.

Inflation-indexed bonds – This is what the finance minister P Chidambaram quoted in his budget speech – “In consultation with RBI, I propose to introduce instruments that will protect savings from inflation especially the savings of the poor and middle classes, these could be inflation-indexed bonds or inflation-indexed national security certificates”. To make investors move their household savings from gold or gold-linked instruments and to safeguard them against high inflation, the finance minister plans to introduce inflation-indexed bonds.

As the name suggests, interest rates on these bonds will be linked to the inflation figures and will be set periodically, say quarterly, half-yearly or yearly. Further details about these instruments will be announced in due course.

Tax-Free Bonds – The finance minister expects the institutions, which are allowed to issue tax-free bonds like REC, PFC, IRFC, IIFCL, HUDCO, NHAI etc., to collectively raise Rs. 25,000 crore in the current fiscal year. To feed the hunger of the infrastructure sector in the coming year as well, the government has decided to allow these institutions to issue tax-free bonds to the tune of Rs. 50,000 crore. The government has not announced the names of institutions allowed to issue tax-free bonds in the next financial year.

DDT on Debt Mutual Funds – The finance minister has also increased the rate of dividend distribution tax (DDT) levied on debt mutual funds from 12.5% to 25%. DDT @ 25% till now is applicable only to the money-market mutual funds, but now it will be applicable to all of the debt-oriented schemes managed by the mutual fund houses in India. This change will become effective from June 1, 2013. So, the existing investors in the dividend option can opt to switch to the growth option to avoid such a high DDT.

The budget has its ups and downs for the fixed income investors. While the introduction of inflation-indexed bonds and the continuation of tax-free bonds are some of the positive moves, the increase in DDT levied on the debt mutual fund schemes is something which will not go well with the investors. Let us hope the features of these inflation-indexed bonds and tax-free bonds are structured to be investor-friendly in the coming financial year.

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