India is heading towards a new economic theory and concept of spendism, disregarding the age old concept of THRIFT.  Indian Civilisation and Culture is built on the simple living but the western influence and the new economists are turning our country into a grave yard where the normal human values are buried. Self centered economics coupled with delusion and maniacism is the rule of the day.

A WRITE UP IN A POPULAR DAILY

That is, a nation cannot grow unless the people spend, not save. Not just spend, but borrow and spend. Dr. Jagdish Bhagwati, the famous Indian-born economist in the US , told Manmohan Singh that Indians wastefully save. Ask them to spend, on imported cars and, seriously, even on cosmetics! This will put India on a growth curve. This is one of the reason for MNC's coming down to India , seeing the consumer spending.

THIS IS THE NEW ECONOMICS.

BORROW AND SPEND.

What is National Savings Certificate-what is it? Where to buy? What are the returns? Tax effects on the income from NSC? Who can purchase? What are the denominations? What is the interest rate? What is the investment limit?

National Savings Certificate (familiarly known as NSC) is one of the safe Investment alternative developed by Government of India with an intention to induce persons to a saving habit and to develop National Savings.   National Saving Certificates in India is ranked as ‘highly secured’ in the class of Investments. It is an Investment’ which has Tax Advantage while (i) Investing, (ii) during the life and (iii) at the time of maturity of the Investment.

Which is the nodal agency appointed by the Government of India to manage it?

Indian Post Department is the nodal agency which makes it available to the common public.

Which offices issue the NSC Certificates?

National Savings Certificate is issued through Post Offices;

What is the Investment limit?

There is no Limit for Investment in NSC.

How will be the interest or income from NSC Treated under the Income Tax Act?

Deposits  up to Rs.1 lakh  in NSC qualify for Deduction Section 80C of the Income Tax Act. Accrued interest on NSC also qualify for deduction u/s. for first five years.

NSC interest is taxable. However, as it is a cumulative scheme (e.g. interest is not paid to the investor but instead accumulates in the account), each year’s interest for the first 5 years is considered reinvested in the NSC. Since it is deemed reinvested, it qualifies for a fresh deduction under Sec 80C, thereby making it tax-free. Only the final year’s interest, when the NSC matures, does not receive a tax deduction as it does not get reinvested, but is paid back to the investor along with the interest of the earlier years and the capital amount.

Cab Non-Resident  Invest?

NO.

What are Denominations in which certificates are issued

The National Savings Certificates (IX Issue) shall be issued in denominations of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000, Rs. 10000.

Can be Purchased Jointly and on behalf of minor?

Yes.

Types of Certificates and Issue thereof,—

(1)  The certificates shall be of the following types, namely:—

(a)  Single Holder Type certificates;

(b)  Joint ‘A’ Type Certificates; and

(c)  Joint ‘B’ Type Certificates;

(2)  (a)  A Single Holder Type certificate may be issued to an adult for himself or on behalf of a minor or to a minor;

(b)  A Joint A Type certificate may be issued jointly to two adults payable to both the holders jointly or to the survivor,

(c)  A Joint ‘B’ Type certificate may be issued jointly to two adults payable to either of the holders or to the survivor;

Where to Purchase?

National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at most post offices in the country.

Can these Certificates transferred from one place to other?

This Certificate can be transferred from a post office where it is registered to any other post office

Are NSC Certificates are accepted as Security for loans?

Yes.

It can be pledged as a security.

What are the main Features of NSC VIII Issue?

·  Scheme specially designed for Government employees, Businessmen and other salaried classes who are Income Tax assesses.

·  No maximum limit for investment.

·  No Tax deduction at source.

·  Certificates can be kept as collateral security to get loan from banks.

·  Investment up to INR 1,00,000/- per annum qualifies for IT Rebate under section 80C of Income Tax Act.

·  Trust and HUF cannot invest.

·  Rate of interest 8.60%.

·  Maturity value of a certificate of INR.100/- purchased on or after 1.4.2012 shall be INR. 152.35 After 5 years.(approximate)

What are the main Features of NSC IX Issue

·  No maximum limit for investment.

·  INR. 100/- grows to INR 234.35 after 10 years.(approximate)

·  Minimum INR. 100/- No maximum limit available in denominations of INR. 100/-, 500/-, 1000/-, 5000/- & INR. 10,000/-.

·  A single holder type certificate can be purchased by an adult for himself or on behalf of a minor or to a minor.

·  Rate of interest 8.90%.

·  Maturity value of a certificate of INR.100/- purchased on or after 1.4.2012 shall be INR. 238.87 After 10 years.

TAX FREE BONDS V/S TAX SAVING BONDS V/S FIXED DEPOSITS ?

An Analysis on Tax Free Bonds V/S Tax Saving Bonds

The basic difference between Tax Free Bonds and TaxSaving Bonds is:

a). Tax free Bonds yields Interest which is not taxable in the hands of Investor whereas in case of Tax saving bonds it is chargeable to Tax in hands of Investor.  Tax Free Bonds are issued by NHAI, Power Finance Corporation (PFC), Indian Railway Finance Corporation (IRFC) AND Tax Saving Bonds are issued by  L&T and IDFC are major players.

b). Investor gets Deduction under Section 80CCF if he invests in Infrastructure Tax Saving Bonds up to Rs. 20,000 whereas same is not available in case of Tax free Bonds.

Tax Free Bonds

The Tax Free Bonds is also used to save tax and are not taxed at the source. The National highway Authority of India (NHAI) has launched Tax free Infrastructure bond. The said bond is listed in NSE and BSE having “AAA” rating which represents highest safety and stability. It is for the very first time where NHAI has been allowed to raise Rs. 10,000 Cr. Through Tax free bond with a coupon rate of  8.2 % for 10 year and 8.3 % for 15 years which will be majorly used in acquiring land for various projects. It is needless to mention here that NHAI is allowed to raise fund through 3 Years 54EC bonds. The said bond has no minimum Lock-In-Period and investor can use exit routes by selling off the bonds on Stock Exchanges. Power Finance company (PFC) also opened its issue on 30^th December, 2011. It is offering rates similar to NHAI. PFC’s offer for bonds is last on 16^th January, 2012.

The Tax Saving Bonds:

Tax Saving Bonds – are instruments used for Individual Income Tax savings. They have not been as popular as some of the other Tax saving instruments, but are ideal for people who have low risk appetite and are looking to preserve their income in the longer run and also accrue benefit of tax savings. In Union Budget 2010-2011, a new section 80CCF was inserted under the Income Tax Act, 1961 – to provide for income tax deductions for subscription to long-term infrastructure bonds. These long term infrastructure bonds offer an additional window of tax deduction of investments up to 20,000. Recently L&T and IDFC have come up with an Issue for Tax-savingbonds.  There is Minimum Lock-In-period for 5 years in Tax Saving Bonds. Investor can sell it on stock exchanges post Lock-In/ buy back offers. The interest rates are 9% . L&T infrastructure bond assigned to credit rating as “AA+”, However IDFC infrastructure bonds have got the highest credit rating of “AAA”.

This article discusses the comparability and expected yields from tax free bonds, tax saving bonds and BankFixed Deposit.

On the face of it, these 8.2-8.3 % Tax-free bond issued by NHAI, PFC are very much comparable to other investments which yield 12% pre tax return. These bonds are even better than Bank fixed deposits, which are currently giving about 9% (pretax) returns. The aforesaid bonds are even better from Tax saving Infrastructure Bonds issued by L&T, IDFC, if we consider effective rate of return on the Bonds.

The example given below demonstrates the same.

Assuming we are Investing Rs. 1,00,000 in each Three i.e. Tax Free Bonds, Tax Saving Bonds and Bank Fixed Deposit.  Let us assume that the said Investment is over and above Investment made under section 80C.

Comparative return from each three investments

Case I   :   Comparison of Tax Free Bonds with Bank FD                    Case II  :  Comparison of Tax Saving Bonds with Bank FD

Case III:  Comparison of Tax Free Bonds with Tax Saving Bonds.

Case I:       Comparison of Tax Free Bonds with Bank F.D.

Analysis of Rate of Return
	Tax Free Bond	Bank FD
Investment	Rs. 100000	Rs.100000
Tax Saving (Assuming 30% tax slab) (A)	-	-
Interest Rate	8.20%	9.00%
Post tax Interest Rate	8.20%	6.22%
	(Tax Free)	(Taxable)
Interest Earning  (B)	8200	6219
Total Earning (A+B)	8200	6219
Effective Rate of Return	8.20	6.22

 Conclusion : Here Investment in Tax free bonds will yield ROR of 8.20% as compare to Bank fixed deposit which yield ROR @ 6.22%. Hence we can conclude that it is better to go for Tax Free bond because it gives us return of Rs. 8200/- as compare to Bank fixed deposit return which is only Rs.6220/- . Alternatively, We can say Tax Freebonds are yielding 132% return as compare to Bank fixed deposit. Here if we consider the span of 5 years, the aggregate return will be 41% (8.20 % *5 years) in case of Tax Free Bonds and 31.1% (6.22*5 years) in case of bank FD. As the return in hands of investor remain same, thus we can conclude that time horizon will not make any difference in earnings of the investor in the above case.

 Case II:     Comparison of Tax Saving Bonds with Bank FD

Analysis of Rate of Return
	Tax Saving Bond	Bank FD
Investment	Rs.100000	Rs. 100000
Tax Saving U/s 80CCF (Assuming 30% tax slab) (A)	6180*	0
Interest Rate	9%	9.00%
Post tax Interest Rate	6.22%	6.22%
	(Taxable)	(Taxable)
Interest Earning  (B)	6219	6219
Total Earning (A+B)	12399	6219
Effective Rate of Return	12.40	6.22

 (*Tax Saving: Rs 20,000 x 30.9 % Tax Maximum amount available as deduction is Rs. 20000 under section 80CCF.  Hence the maximum tax benefit that can be availed is Rs 6180/-.)

√ Conclusion: If we consider Investment at a span of One year the Tax Saving Bonds yields ROR @ 12.40% whereas yielding ROR for Bank fixed deposits is @6.22%. Hence we can conclude that it is better to go for Tax Saving Bonds because it gives us effectively Rs. 12400/- as compare to Rs 6220/- earned from Bank Fixed Deposits. Alternatively, We can conclude that Tax Saving Bond is yielding 199% return as compare to Bank Fixed Deposits.

√  Again if we consider period of 5 years the earning ROR of investor would be as follows in both the cases:

Aggregate Effective Rate of Return for five years

	Investment Option
Year	Tax Saving Bond	Bank FD
First year	12.40	6.22
Second Year	6.22**	6.22
Third Year	6.22	6.22
Fourth Year	6.22	6.22
Fifth Year	6.22	6.22
Aggregate Effective ROR for Five years	37.28	31.10

 **No deduction u/s 80CCF for 2^nd & subsequent years.

It is clear from above table that even from 2^nd year onwards ROR of both the option are same but the aggregate effective ROR for five years is higher in case of Tax saving Bonds as compared to Bank fixed deposit. This is because in the first year investor can claim deduction up to Rs. 20,000 which is not available in case investment made in Bank fixed deposit.

Case III:  Comparison of Tax Free Bonds with Tax Saving Bonds.

Calculation of Effective Rate of Return
	Tax Free Bond	Tax Saving Bond
Investment	Rs.100000	Rs. 100000
Tax Saving U/s 80CCF (Assuming 30% tax slab) (A)	-	6180*
Interest Rate	8.20%	9%
Post tax Interest Rate	8.20%	6.22%
	(Tax Free)	(Taxable)
Interest Earning  (B)	8200	6219
Total Earning (A+B)	8200	12399
Effective Rate of Return	8.20	12.40

(*Tax Saving: Rs 20,000 x 30.9 % Tax Maximum amount available as deduction is Rs. 20000 under section 80CCF.  Hence the maximum tax benefit that can be availed is Rs 6180/-.)

Conclusion: At a span of one year Tax Free Bonds yields ROR@8.20% whereas investment in Tax Saving Bonds yields ROR @ 12.40%. Hence we can say it is better to go for Tax Saving Bond because it yields effectively Return of Rs. 12400/- as compared to earnings of Tax Free Bonds which is Just. Rs. 8200/-.  However if period of five year is taken into consideration the scenario would be as follows:

Aggregate Effective Rate of Return for five years
Year	Tax Free Bond	Tax Saving Bond
First year	8.20	12.40
Second Year	8.20	6.22**
Third Year	8.20	6.22
Fourth Year	8.20	6.22
Fifth Year	8.20	6.22
Aggregate Effective ROR for Five years	41.00	37.28

** No deduction u/s 80CCF for 2^nd & subsequent years.

It is clear from above table that at a span of five years the overall return in the hands of the investor is higher in case of Tax Free Bonds as compared to Tax Saving Bonds and Bank Fixed Deposits. This is actually nothing but just an opposite of what conclusion we have drawn from one year calculation.

The Tax saving bonds may yield quite higher return than Bank FD and Tax free bond in the initial year but at the span of 5 years Tax Free Bonds yields higher rate of return.