How to earn Higher Tax-efficient return than Fixed Deposit or Debt Mutual Fund?

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How to earn Higher Tax-efficient return than Fixed Deposit or Debt Mutual Fund?

The very fact that you are reading this article because either you have a BANK Fixed Deposit or a Mutual Fund Investment in debt scheme. You may also have a plan to invest in any of them.

In the last 2-3 years, the deposit rates of Fixed Deposits have come down drastically and currently, they offer around 5-7.5% interest rates for a period ranging from 6 months to 7 years and above.

The Debt Mutual Fund has also not performed up to the market expectations in the recent past. Most of the long-term products like Credit Risk Funds, Corporate Bond Funds, etc. have delivered in the range of 5-6.5% average returns in the last three years.

The advantage which Debt Mutual Fund has over Fixed Deposit has not given desired results owing to lower returns and lower indexation benefits. The smaller indexation benefit is due to lower inflation in these years. More about Indexation benefit do read

Indexation Benefits
How to reduce capital gain tax through Indexation?

Bond price changes mainly due to change in the interest rate or interest rate perception and macro-economic factors like fiscal deficit, besides demand and supply for bonds.For more details, do read, All about Debt Mutual Funds

Debt Mutual Fund

I am going to discuss here an alternative to Bank Fixed Deposit and Debt Mutual Fund, which has the following benefits

  • Higher returns
  • Higher tax-efficient returns
  • Higher liquidity
  • No TDS

Bonds and Debentures

These are the instruments issued by the government, private companies and institutions. These instruments are mostly bought by institutional players like FII, DII, Institutional players, etc.  

Retail investors do not invest in the secondary debt market as they are unaware of the benefits and advantages offered by the secondary debt market. There is also a perception that this segment is only for institutional players. This is not correct, even retail investors can buy these instruments.

SEBI has taken various initiatives to popularize retail debt investment. In 2006 SEBI, vide circular SEBI/CFD/DIL/BOND/1/2006/12/12, has issued guidelines for reporting all debt trades to the Exchange like The National Stock Exchange (NSE) and The Bombay Stock Exchange (BSE). All the trades of value more than Rs.1 lakh have to be reported to The Exchange.

The Exchange BSE/NSE role

In the last ten years, the debt market has gained retail momentum, and both the exchanges have taken the initiative to retailed debt investment. The separate platforms from The National Stock Exchange (NSE) (NSE-WDM(Debt Segment) and The Bombay Stock Exchange (NDS-RST) are used for trading and reporting of debt securities.  

Important features of the trading platforms are as follows:-

  • Members are provided with a facility to report transactions in Corporate Bonds.
  • Members shall report all transactions executed on their behalf and also on behalf of their clients.
  • Members/Broker shall report the transactions through the National Exchange for Automated Trading Wholesale Debt Market (NEAT WDM) or BSE ODIN
  • Corporate bonds – Corporate bonds for this purpose shall be the debt securities listed on the NSE
  • Value – All transactions in corporate bonds of value of Rs. 1 lakh or above and in multiples thereof informed.
  • Time – Members have to report the deals within 30 mins of transactions.
  • Market Timings – Market timings are from 10.00 a.m. to 5.30 p.m. on all trading days.

Advantages of investing in Bonds and Debentures

  • Higher yield/return than traditional fixed deposits rates prevailing in the market.

For example, SBI Bank Fixed Deposit gives you interest in anything between 5-7% for term deposits of various time periods. Whereas if you buy an SBI Bond from the secondary debt market, you can get a much higher yield.

The same goes for other reputed banks and financial institutions. The fixed deposit rates offered by banks are lower than the yields/return offered by the Bonds of these institutions traded in the Debt Market

  • Besides return, another significant benefit is a Tax Benefit. After one year, the investor is eligible for indexation benefit if bought through the stock exchange

Whereas  The Debt Mutual Fund investment is eligible for indexation benefit after three years of investment.

In Fixed Deposits of banks, Interest earned is added to your income and taxed at your marginal rate. There is also Tax Deducted at Source (TDS) on interest earned.

  • Liquidity is high in Bonds and Debentures as compared to Debt Funds. You can buy or sell bonds anytime at the Exchange.  Debt Mutual Funds have an exit load period, where withdrawal before the exit load period draws a penalty called exit load.

Also, if one withdraws before the three years, one loses indexation benefit and taxed at the marginal rate. 

Higher returns, Higher liquidity, and Lower taxation make Bonds and Debentures a better venue to invest compared to Bank FD or Debt Mutual Funds.

How to buy Bond and Debentures

There are various options to purchase Bonds and Debentures from the secondary market (Stock Exchange)

  1. Through the Stock trading account, one can easily buy Debt securities like bonds or debentures.

Most of the stockbrokers, like ICICI Securities, HDFC securities, zerodha, etc. offer you to buy through their trading platforms.

The recent trading price and Yield at which Bond and Debentures are traded is updated by stock broking companies. This information gives an idea of the expected return from the security you want to buy.

Information regarding current price, residual maturity period, and current return one can get from Exchange. Accordingly one can plan his investment as per risk appetite and investment time horizon.

The best way to know the latest trading price and yield for a particular security is to visit the Bombay stock exchange site and visit the debt market segment.
Reporting of all deals executed at the Debt Market is done at the Exchange 

 One can use the below link to go through the latest trading price.

Corporate Bond Reported on NDS-RST


Just as we buy stocks through our stock broker trading platform, the same way we can buy Bonds and Debentures. Search for particular security with security code (shown in the above figure) and place your order.

YIELD will give you an idea of the expected return one can get, including periodic interest by holding till maturity period.

The maturity period indicates when particular security matures.

  • Trade through GoldenPI trading platform

The trading platform is dedicated exclusively to bonds and debentures trading. The platform is easy to understand and trade.

One can visit their website at GoldenPi


Debt Markets have come a long way for retail investors. The investment in Debt has become easy and tax-efficient. Especially if one buys debt from the secondary market through the Exchange. The indexation benefit is applicable only after one year. Whereas for Debt Mutual Funds, the indexation benefits are applicable only after three years of holding. Opportunity to get higher yield in a tax-efficient way makes buying Bonds from the secondary debt market more attractive. Do explore this option to have exposure in Debt.

Do write for any additional information or feedback. Shubhwealth

This Post Has 15 Comments

  1. Anannya

    Great stuff..

    1. Shubh Wealth

      Thanks Anannya..

  2. Dhanush. R

    Very useful and enlightening

    1. Shubh Wealth

      Thanks dhanush…

  3. Sweta Gupta

    Very good information for new investor

  4. Sanjay Gupta

    Very Good informations

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