Are NABARD Bonds the best Government backed investment option?

Faced with stock market fall and safety of investments in various instruments, many investors are resorting to options which are safe and Government backed with decent returns.

Apart from Bank FD, PPF, NSC, KVP, there is an option of investing in Bhavishya Nirman Bonds which are issued by NABARD, which claims to give attractive return to investors.

These bonds are issued at a price of Rs.8500 and redeemable after 10 years at Rs.20000. There is no money flow during this period. So, ittranslates into a return of Rs.11500 in 10 years on an investment of Rs.8500.

These bonds can be held in demat form also making it easy for investors to liquidate their holdings, as these bonds are listed on BSE.

The simple rate of return on these bonds works out to be 12.18% (as advertised by NABARD), however the compounded rate of return is 8.93% post-tax better than best available PSU Bank FD rates of 10.5% for investors in highest income tax bracket.

However, there are certain issues to be considered before making investment. Firstly, FDs are highly liquid while these bonds have a 10 year lock in which is quite a long period. Even by selling these bonds on BSE, the returns would be much less than anticipated.

Secondly, the post tax returns is as per current Income Tax Laws. It is very uncertain as to what will be the Capital Gains tax rates after 10 years, as the taxationliability would be according to the prevailing tax laws in that financial year.