Budget 2014 and investing in NCDs. | srei
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Budget 2014 and investing in NCDs.

Budget 2014 was presented amidst huge expectations from the new government at the centre. The much talked about fiscal deficit, the amount that the government spends over and above its income, has been maintained at the level that the previous government planned. Consequently, the quantum of borrowing by the new government too remains almost unchanged. This is positive for the bond markets including Non-Convertible Debenture (NCD) as any additional borrowing by the new government would have sent bond yields upwards and adversely impacted bond prices. 

The other positives for the bond investors

There were other positives for bond and NCD investors too in budget 2014. And these could turn out to be huge ones over time. Here’s a look:

  1. Bond investing becomes more attractive than bond fund investing: Investors always had the choice of either investing in bonds and NCDs directly or through mutual fund schemes that invest in these bonds. Till now, bond funds offered by mutual funds had a slight tax advantage over the direct route as Long Term Capital Gains (LTCG) from these schemes were taxed at either 10% without indexation or 20% with indexation. But now the 10% option is gone bringing them on par with direct bond investing. Put simply, direct bond and NCD investing now is on par with bond fund investing with regard to tax rates.

    But more importantly, the time period for a capital gain to be reckoned as long term has now been increased to 36 months from 12 months previously for debt funds. That is, only if a bond fund investor holds his investment for more than 36 months would he be able to avail indexation and pay the LTCG tax. For holdings less than 36 months, the gains if any would be considered as Short Term Capital Gains (STCG) and added to the normal taxable income and taxed at the marginal slab rate applicable to the investor. But the situation remains unchanged for direct bond and NCD investors who can continue to claim indexation for holdings above 12 months and pay the concessional LTCG as before. In a nutshell, direct bond investing has become more attractive than bond fund investing from the taxation angle.

      New LTCG eligibility period Old LTCG eligibility period New LTCG rate Old LTCG rate Remark
    Bond funds 36 months 12 months 20% with indexation only 20% with indexation or 10% without indexation Both the period and tax rates have been changed.
    Bonds & NCDs 12 months 12 months 20% with indexation only 20% with indexation only Both remain unchanged/

    NOTE: Budget 2014 announcements are presently only proposals and have yet to be cleared in the parliament in order to be implemented.

  2. Budget thrust on infrastructure sector: There are many budget proposals that support and encourage the infrastructure sector. This would mean more projects and possibly more bond and NCD issuances by the companies which could result in more investment options for bond investors.

On the whole, Budget 2014 has been a good one for bond and NCD investors. With the Indian economy expected to turn around in the coming quarters, investors can look forward to exciting opportunities in this space given the improving credit quality.