Bank FD vs bond yield: Which is better? Explained with top 5 benefits

Bank FD vs bond yield: After three months of the new financial year, people are preparing to file their income tax returns (ITRs). While earning individuals are busy calculating their income tax outgo, they are also looking at the avenues that can help them save their income tax outgo and earn higher than traditional sources of income like bank fixed deposits (FDs). Bonds can be a better bet for such income taxpayers who are ready to take some risk than the risk-free bank FDs. According to tax and investment experts, bank FD yield is around 6 percent whereas the bond yield is around 9 percent, which is 50 percent higher than bank FD interest. They said both have a lock-in period, but income from the bond yield is exempted from the income tax.

Why is a bond better than a bank FD?

Batting in favour of bonds, Prateek Toshniwal, Co-founder at MI CAPITAL Services, said, “While bonds and fixed deposits are both lucrative investment options in India, in my opinion, a few benefits of the former outweigh the latter. For instance, bonds generally offer much higher interest returns than fixed deposits. Bonds with a lock-in period can offer up to 9% returns, much higher than interest earnings on fixed deposits.”

Highlighting the income tax benefits for bond investors, Prateek Toshniwal said, “Another factor that makes investing in bonds is their tax implications. Bond earnings are not subject to taxation or TDS. However, according to the Income Tax Act of 1961, the interest earned on fixed deposits is treated as ‘income from other sources’ and taxed accordingly. Besides these, investors can sell their bonds to encash capital appreciation opportunities, an option not available to fixed deposit account holders.”

Highlighting other than income tax benefits that a bond investor enjoys, Vaibhav Shah, Fund Manager at Torus Oro PMS, said, “Bonds provide the necessary diversification as a part of overall debt allocation. While FD rates vary in a defined range, Bonds provide a much larger avenue to take advantage of interest rates across tenure and ratings. Bonds also provide a liquidity advantage where the same can be liquidated in the OTC market compared to FD, which attracts breakage charges. Long-term bonds companies raise for capex generally attract good yields and thus increase the overall return. Bonds are also structured to replicate some indices, opening up different investment avenues.”

Bond yield: Top 5 benefits

On why bonds are better than bank FDs, Kamal Kalaria, Marketing Consultant at Sunrise Gilt & Securities, listed the following five benefits:

1] Higher returns: One of the most compelling reasons to consider bonds over bank FDs is the potential for higher returns. Fixed Deposits offer fixed interest rates, which tend to be lower due to their low-risk nature. In contrast, corporate bonds often provide higher interest rates, rewarding investors with better returns for the additional risk taken.

2] Tax efficiency: Bonds can be more tax-efficient than FDs. The interest earned on FDs is fully taxable according to the investor’s income tax slab. However, certain bonds, such as municipal bonds, offer tax-free interest income. Moreover, long-term bond capital gains can benefit from indexation, reducing the overall tax burden.

3] Liquidity and tradability: Bonds generally offer better Liquidity than FDs. While FDs typically have a lock-in period during which premature withdrawal can lead to penalties, bonds can be traded on secondary markets, allowing investors to liquidate their holdings more efficiently and at potentially better prices.

4] Regular income: Bonds are a reliable source of regular income through periodic interest payments, known as coupon payments. This feature makes them an attractive option for retirees and those seeking steady cash flows. Unlike FDs, where interest is typically paid at maturity, bonds can provide a consistent income stream throughout their tenure.

5] Market dynamics and growth opportunities: The bond market offers a variety of instruments catering to different risk appetites and investment horizons. Investors can choose bonds that align with their financial goals and market outlook, from government securities to corporate bonds and high-yield options. Bonds also benefit from favourable market conditions, such as declining interest rates, which can lead to capital gains.

Disclaimer: The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.