- A new exchange-traded fund called Bharat Bond ETF will be launched today
- The ETF will be launched by the government of India fund and managed by Edelweiss Asset Management Company.
- These bonds can be traded in the stock exchange but it is advisable that small, not-s0-savvy investors hold it till maturity.
- Investing in Bharat Bond ETF will help save taxes especially for those in the highest bracket of 30%.
A new exchange-traded fund called Bharat Bond ETF will be launched today by the government of India and managed by Edelweiss Asset Management Company. This is open to small investors who can buy units for as little as ₹1,000.
The Bharat Bond ETF is like a mutual fund but there is no one picking shares. It will basically mirror the performance of the Nifty Bharat Bond Index. ETFs are considered better because the investor loses less money as expense as well as for its tax benefit.
These bonds can be traded in the stock exchange but it is advisable that small, not-s0-savvy investors hold it till maturity. If you buy and sell the bond on the stock exchange, there is a risk of losing money due to external factors like change in interest rates. But if you invest and hold the money till maturity, you will get the same yield as decided at the time of investing.
Tax benefit from Bharat Bond ETF
Investing in Bharat Bond ETF will help save taxes especially for those in the highest bracket of 30%. The ETF is better than the comparable fixed deposits at banks for the following reasons.
| Comparison | Fixed Deposit | Bharat Bond ETF | Remarks |
| Lock-in period | 5 years | Can sell at any time | However, tax and indexation benefit available after 3 years |
| Rate of return | 6% to 7% | Current yield on PSU bonds 6.5% to 7.5% | Holding for the whole tenure will erase the market risk and deliver the exact returns expected |
| Tax rate | According to income tax slab | Flat 20% | So even if you are in the 30% bracket, the income/gains from ETF, after holding for 3 years will be taxed at 20% |
| Indexation benefit | None | Yes | The longer you hold the ETF (at least 3 years), more money you save in taxes |
Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it — higher the purchase price, lesser the taxable profit.
Here's an example from Clear Tax to explain how it works:
Say, your invested ₹10,000 in a debt mutual fund, and you bought the units at a NAV of Rs.10. Three years later, you redeem your investments in August 2019 at a NAV of ₹20.
Hence, when you sold your investments, the value of your investments was ₹20,000. Your investment made capital gains worth Rs.10,000. However, you need not pay tax on this entire amount of ₹10,000.
As your holding period was three years, you will get the benefit of indexation to reduce the value of your long-term capital gains.
To arrive at the Indexed Cost of Acquisition (ICoA), you have to use the following formula:
ICoA = Original cost of acquisition * (Cost inflation index of the year of sale/Cost inflation index in the year of purchase)
In the example mentioned above, the indexed cost of acquisition will be ₹10,947, i.e., (10,000 * 289/264). Hence, instead of Rs.10,000, your capital gains will now be ₹9,053, i.e. (₹20,000 – ₹10,947).
Using indexation, you would have managed not to pay tax on ₹947 of your gains. Your tax will be computed on only ₹9,053, which will be equal to ₹1,810. Without indexation, the tax would have been ₹2,000. That's a saving of ₹190 for every thousand bucks
The benefit of indexation works best when your holding period is longer.
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